These are presented in the table on historical and industry average ratios below. To Do: a. Calculate the firm’s 2012 financial ratios, and then fill in the preceding table. (Assume a 365-day year. ) b. Analyze the firm’s current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt, profitability, and market. c. Summarize the firm’s overall financial position on the basis of your findings in part b. Answers a.
Ratio| actual| actual| actual| Industry average| | 2010| 2011| 2012| 2012| Current ratio| 1. 7| 1. 8| 2. 5| 1. 5| Quick ratio| 1. 0| 0. 9| 1. 4| 1. 2| Inventory turnover| 5. 2| 5. 0| 5. 3| 10. 2| Average collection period| 50. 7 days| 55. 8days| 57. 9 days| 46 days| Total asset turnover| 1. 5| 1. 5| 1. 6| 2. 0| Debt ratio| 45. 8%| 54. 3%| 57. 0%| 24. 5%| Times interest earned ratio| 2. 2| 1. 9| 1. 65| 2. 5%| Gross profit margin| 27. 5%| 28. 0%| 27. 0%| 26. 0%| Net profit margin| 1. 1%| 1. 0%| 0. 7%| 1. 2%| Return on total assets | 1. 7%| 1. %| 4. 9%| 2. 4%| Return on common equity| 3. 1%| 3. 3%| 2. 7%| 3. 2%| B. Liquidity: Current ratio: Looking from the cross-sectional viewpoint this ratio is bigger than the average figure of the industry. This was mainly caused by decreased current liabilities(shows that the company might be not using its current assets or its short term financing facilities).
In the year 2010 and 2011 the company had a ratio closer to industry average so it means that the firm during the 3 year period had enough resources to pay its debt over the next 12months.
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Quick ratio: this ratio is close to the average industry ratio. It tells us that the company is doing quite well and is able to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Looking back at 2010 and 2011, the firm had a smaller ratio and it only confirms the fact that before it had more liabilities and inventory. Activity: Inventory turnover: this ratio is 2 times smaller than the average of its industry.
A low turnover rate may point to overstocking, obsolescence or deficiencies in the product line or marketing effort. Comparing to the previous year this ratio is a bit bigger, so that might mean that the company is doing better one step at a time. Average collection period: More than 10 days longer than the average of the industry. This means that it may need a longer time period to turn the firms receivables into cash since the company receives its payments owed later as it is usual. In 2010 and 2011 the company was receiving money faster.
Total asset turnover: Comparing to the average of the industry, it is smaller but higher than in 2010 and 2011. This means that the company is a bit more efficient to use its assets in generating sales revenue or sales income to the company. Debt: Debt ratio: more than 2times bigger than the industry average. It is well known that the higher the debt ratio is, the greater the risk will be associated with the firm’s operation. In addition, high debt ratio may indicate low borrowing capacity of a firm which in turn can lower the firm’s financial flexibility.
Compared to 2010 and 2011, this ratio has been growing and it indicates that the company’s operations are going to a higher risk level. Times interest earned ratio: 3 times bigger than the average. A high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects (decrease in liabilities shown in the table).
The Essay on Industry Average Ratio Company 2002
Martin Manufacturing Company Historical Ratios RATIOS ACTUAL 2001 ACTUAL 2002 ACTUAL 2003 INCREASE (DECREASE) INDUSTRY AVERAGE Current ratio 1. 7 1. 8 2. 5 0. 7 1. 5 Quick Ratio 1. 0 0. 9 1. 3 0. 4 1. 2 Inventory turnover (times) 5. 2 5. 0 5. 3 0. 3 10. 2 Average collection period (days) 50. 0 55. 0 58. 0 3. 0 46. 0 Total asset turnover (times) 1. 5 1. 5 1. 6 0. 1 2. 0 Debt Ratio (%) 45. 8 54. 3 ...
In 2010 and 2011 this ratio was close to the average. Consequently, firm needs to invest its money into operations which would ensure the growth of the company. Probability
Gross profit margin: Almost the same as the average which reveals that the source for paying additional expenses and future savings is satisfactory. Comparing with the year 2010 and 2011 it was pretty much the same, so we can draw a conclusion that the situation in the company at the moment is stable. Net profit margin: 2 times lower than the average and comparing with the previous period decreased noticeably and a low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.
Market (P/E) ratio, (M/B) ratio- not included c. In conclusion, taking into consideration ROA and ROE ratios, the company is not at a higher efficiency level because management is not using its assets and investment funds to generate earnings growth at its full capacity (compared to average).
The company should concentrate on long- run investment plans to stabilize current situation.
