GAL has a current ratio of less than 2 and less than PAP in 2012 meaning it does not have a satisfactory amount of current asset to cover its current liabilities. However, when it comes to 2012, both current ratio and quick ratio has a positive improvement showing GAL did not improve its short-term liquidity by stocking high level of inventory but really increased its level of cash and receivables. On the other hand, the operating cash flow ratio of GAL has reduced in 2012 meanings the decrease of ability to generate cash from operation.
The increased amount of cash but decrease amount of ability to generate cash reveals that GAL increase its amount of cash by financing activities like issue of shares and borrowing. This activity makes Debt and coverage There are five ratios measuring the debt and coverage of a company. They are three debt ratios, Liabilities to Equity ratio, Debt to Equity Ratio and Capital Structure Leverage, Interest Coverage and Operating Cash Flow Ratio. All debt ratios of GAL have a sudden and great increase in 2012.
It indicates that GAL increase its cash mainly by borrowing rather than issue share. This practice calling debt financing can get tax deduction which is more beneficial than equity financing. The company’s interest coverage has dropped significantly discloses the decline of ability to pay interest due to the great amount of borrowing. However, when compared to PAP, the debt ratios of GAL still are not as great as that of PAP and GAL has higher interest coverage. This shows GAL is not in a very bad situation in borrowing.
Efficiency The efficiency of GAL has decreased compared to last two year showing by the remover ratio such as Account Receivable, Inventory and Fixed Asset turnover. Nevertheless, the turnover rates of GAL are still greater than PAP and that of PAP are at the same time decrease. This may expose the fact that the efficiency of the industry is lower in 2012. Overall, GAL has a very poor performance in 2012. Although this may be due to the low efficiency of the industry, the main reason is the low profitability of GAL together with the huge borrowing. The fact that GAL did not make the best use of the borrowing is brought to light.