Q.21

Question 21 (8 points) At the end of 2019, Baby Ltd. faced increasing competition leading to a build up of inventory, declining profitability and liquidity. In an effort to generate more revenue and improve the company's financial position, the management team determined that the best course was to reduce prices and extend generous credit terms that would generate higher sales and cash flow. The results of the initiative are show in the following table: 2.2 Ratio 2019 2020 Industry Current Ratio 1.9 2.1 Accounts Receivable 7.8 6.5 6.6 Turnover Inventory 3.9 5.8 5.4 Turnover Gross Profit 59% 59% 58% Margin 11% Profit Margin 12% 12% 25% 26% 27% Return on Equity Times Interest 4.0 4.1 3.9 Earned 61% 63% 69% Debt to Assets Free Cash Flow $122 $129 $127 (thousands) Capital expenditures remained unchanged and no dividends were declared. Using the above information to support your answer, complete the following analysis in your own words: 1. Discuss Baby's liquidity. (2 marks) ofitabilite 12 marks) *Capital expenditures remained unchanged and no dividends were declared. Using the above information to support your answer, complete the following analysis in your own words: 1. Discuss Baby's liquidity. (2 marks) 2. Discuss Baby's profitability. (2 marks) 3. Discuss Baby's solvency. (2 marks) 4. Conclude on the success of managements initiative and explain the reason for your conclusion. (2 marks) % O. + Paragraph B I UA 1 Answer Part 1 (liquidity discussion); Answer Part 2 (profitability discussion); Answer Part 3 (solvency discussion); Answer Part 4 (Conclusion)