Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabrica
ID: 2779111 • Letter: B
Question
Bluestone Metals, Inc., is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used state-of-the-art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Bluestone’s current ratios and quick ratios for the past 6 years are shown in the table below:
2010
2011
2012
2013
2014
2015
Current ratio
1.2
1.4
1.3
1.6
1.8
2.2
Quick ratio
1.1
1.3
1.2
0.8
0.6
0.4
What do you think of the CEO’s claim that the firm is lean and soon to be profitable? (Hint: Is there a possible warning sign in the relationship between the two ratios?)
2010
2011
2012
2013
2014
2015
Current ratio
1.2
1.4
1.3
1.6
1.8
2.2
Quick ratio
1.1
1.3
1.2
0.8
0.6
0.4
Explanation / Answer
The current ratio is good and profitable.But the quick ratio has been decreasing for the years.
It signifies that the invetory levels are more and recovery of accounts receivable is not proper.Hence, it affects the profitability.
Thus, the CEO's claim is not correct.