Western Gear Harvard Case Solution & Analysis

Introduction:

Western Gear is a small merchandiser which deals in outdoor recreational equipment. Jose Sanchez is the owner of Western Gear and he also operates the company. Western Gear started their business pretty impressively, their financial ratios were moderate and liquidity ratios were impressive but profitability ratios were alarming which should be improved. Western Gear’sliquidity ratios are above the benchmark of the industry averages which is a positive sign as the company can sustain its day-to-day operations smoothly.

On the other hand, Western Gear’sprofitability ratios are alarming and should be concerning for the owners as they are moving on a decreasing trend. Company management should take necessary steps not only to improve its sales but also to bringWestern Gear into a more profitable position.

As per the Financial Statement, one other problem for Western Gear is that, they are not utilizing their assets effectively which is a negative indication and it will ultimately result in lesser return on their investment. So Western Gearshould not only improve its profitability but should also use their assets and resources more effectively.

Western Gear Harvard Case Solution & Analysis


 

1.    Is it becoming easier for the company to meet its current debts on time and to take advantage of cash discounts?

 

In order to analyze whether Western Gear is self-sufficient enough to meet its current debts easily on time, we need to analyze the liquidity ratios of Western Gear. In this scenario, we will take current ratio and acid test ratio of Western Gear to analyze whether the company is capable enough to meet its current debts on time. As the current ratio shows the ability of the company, it measuresthe capability to pay its short term obligation on time to support and sustain its operations.

Western Gear’s Current ratio is 2.6:1 in 2006, 2.4:1 in 2005 and 2.1:1 in 2004(mentioned in exhibit 1). As the benchmark of the current ratio is 2:1, so in Western Gear’s case scenario, it is showing improvement in trends as all of the current ratios in the last three years are above the benchmark of 2:1 which is a very good indication for the company as this shows the company is capable enough to pay its current debts on the basis of its current ratio. So this show its positive financial health to meet its current debts.

Meanwhile, on the basis of acid test ratio, which is also known as quick ratio. It is a more conservative way to measure the company’s ability to meet its short-term liabilities on time. In Western Gear’s scenario, its acid-test ratio in 2004, 2005 and 2006 is at 1.2, 1.1 and 0.8, respectively. As the benchmark of acid-test ratio is 1:1, so it is slightly below the benchmark as inventories is not included in acid test ratios which makes this more conservative way of measuring the ability to pay of its short-term debts and liabilities. Although it is slightly below but it is not an alarming situation as per their financial health. It can be further improved by increasing their Current Assets and decreasing their Current Liabilities............

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