First Farms Corporation (a)

In: Business and Management

Submitted By mikeryan
Words 1063
Pages 5
Improving the Company’s Return on Equity (ROE)
During the year of 1995, the Company’s ROE decrease by five percent (5%) from twenty-one percent (21%) to sixteen percent (16%) as shown in Exhibit 3 – The Profitability Ratio. One of the causes of the decline of their ROE is when the company went public in February 1995 to raise capital and P476 million was used for the expansion of its operation capacities in poultry dressing, hatching and feedmilling and to acquire additional delivery equipment, warehouses and silos. Moreover, about P500 miliion was used in the livestock inventories and raw materials and the remaining P69 million was used to retire part of the corporation’s long term debt.
However, to improve the ROE of the company, an improvement on the Profitability Ratios, Efficiency Ratios and the Leverage Ratios should also be improved to overcome the deficit in the ROE. The Operating Efficiency Ratio in Exhibit 4 shows the decrease in trend in Account Receivable Turnover from 14.19 in year 1993 to 7.65 in year 1995 that results to a longer collection of receivables from 25 days in 1993 to 47 days in 1995. The company needs to implement a stricter policy in collecting their receivables and reduce the Average Age of their Account Receivable collection to improve their Account Receivable Turnover. Another aspect of the Efficiency Ratio that must be improved is the Inventory Turnover that saw a decrease from 5.13 in year 1994 to 3.48 in year 1995, thereby, increasing the age of inventory from 70 days in year 1994 to 103 days in 1995. The data shows that the movement of the inventory goods has slowed down that may result into a higher holding cost while keeping the stocks of the inventory, wherein an opportunity cost is tied up in the inventory, material handling and labor costs of goods. The company needs to look for ways to move the amount of inventory in a…...

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