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Financial Ratios Analysis Of Pumpkin Patch Limited

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Introduction

This is the report about financial ratios analysis of Pumpkin Patch Limited(PPL). This children’s clothing retail brand began with one store in 1991, now has about 600 employees across 43 stores in New Zealand and 1000 staff in 117 stores in Australia. However, it tripped into receivership recently. At the same time, Pumpkin Patch managing director Luke Bunt said “however, despite considerable efforts by the board and its management team, it has become evident that no solution is available to the company, at this time, to address the current over-leveraged and significantly capital constrained position.” (McNicol, 2016)
This report will discuss the reasons for PPL’s failure, which is supported by the research mentioned
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Moreover, comparing zero interest bearing liability in 2014 with 41 million in 2015, the current liability was increased from 30 million to 72 million. It also explained why current ratio was declined from 3.04 in 2014 to 0.88 and 0.73 in 2015 and 2016 separately.
The quick ratio is a more rigorous test for the company’s ability to meet its short-term debts than current ratio because inventory was eliminated from current assets. The quick ratio for PPL indicates serious issues as it has decreased from 0.31 in 2012 to 0.07 in 2016. The low quick ratio implies that a considerable portion of the current assets of the company is tied up as part of its inventory (Bragg, 2007), which means that the lower level of quick liquidity ratio indicates a high level of financial risk. The balance sheet for PPL (PPL, 2016) revealed that, particularly in 2016, the inventory accounted for 90% of the current assets. Therefore, the company must improve its working capital to meet its near term current liabilities.
The cash conversion cycle is a result of time taken by the company for their collection from receivables (average collection period) and time needed to convert material into goods (day inventory held) after subtracting the time taken to pay its current obligation (day payable outstanding). The average collection period of account receivable and the day inventory held ratio improved in 2016 after rose to the highest days in 2014, which
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