Pace Leisurewear Limited (PLL) is experiencing rapid development and achieving a sales boost in the recent years. In order to support the business expand, the company utilised an overdraft of £4,250,000 as well as more loan notes last year. The excess usage of the overdraft increased serious attention from the bank, and therefore a considerable reduction in the overdraft was required by the bank. However, the big order from Arena will be unfulfilled in case of the reduction of the overdraft and the business is unable to raise new finance. This report will analysis the financial position and the problems faced by PLL by assessing varied financial ratio. After assessing profitability, efficiency, …show more content…
Disaggregating this ratio it could be seen that the decrease was due to the fact that current liabilities grew faster than current assets (256% versus 129%). It reflects that there was a decline in term of the company’s ability to service its short-term financial obligations. Generally, a higher current ratio is preferred, especially in the garment manufacturing industry, because it has to hold slow-moving inventories. For instance, River Island Clothing limited (RICL), a similar business to PLL in the same industry, reported 2.9 in terms of current ratio in the 2015 (Company Check, 2016). Comparing the level achieved by RICL, the current ratio of Pace Leisurewear Ltd was insufficient, revealing PLL suffered from inadequate capacity to satisfy its current liabilities with its current …show more content…
As explained earlier, the inventory turnover period of PLL was 182.8 days in the last year, which means the company cannot turn inventories into cash quickly. Therefore, the corporate relies heavily on cash and trade receivables to pay its overdrawn amount to the bank, and removing inventories from the calculation could provide a clearer indication of its liquidity. Last two years the level for this ratio were both to be below 1.0 times, 0.5 and 0.8 respectively, which were relatively lower than normally expected for a young, expanding business. The ratio provides a clue that there may be a greater risk to the company that cannot meet its short-term financial