1.6.Reworked Results for Change in Annual Dividend of 2007-20119Part A: Case: Martin Manufacturing’s Current Financial PositionMartin Manufacturing Financial Ratios AnalysisCalculationsCurrent Ratio = 1,531,181 / 616,000 = 2.5Quick Ratio = (1,531,181 – 700,625) = 1.3Inventory Turnover = 3,704,000 / 700,625 = 5.3 timesAverage Collection Period = 805,556 / (5,075,000 / 360) = 57 daysTotal Asset Turnover = 5,075,000 / 3,125,000 = 1.6 timesDebt Ratio = 1,781,250 / 3,125,000 = 57%Times Interest Earned = 153,000 / 93,000 = 1.6Gross Profit Margin = 36,000 / 5,075,000 = 0.71%Return on Total Assets = 36,000 / 3,125,000 = 1.2%Return on Equity = 36,000 / 1,343,750 = 2.7%Periodic Historic RatiosThe tabulated ratios are as follows: 200920102011Industry AverageCurrent Ratio22.214.171.124.5Quick Ratio10.91.31.2Inventory Turnover5.2 times5.0 times5.3 times10.2 timesAverage Collection Period50 days55 days57 days46 daysTotal Asset Turnover1.5 times1.5 times1.6 times2.0 timesDebt Ratio45.80%54.30%57%24.50%Times Interest Earned126.96.36.199.5Gross Profit Margin27.50%28%27%26%Net Profit Margin1.10%1.00%0.71%1.20%Return on Total Assets1.70%1.50%1.20%2.40%Return on Equity3.10%3.30%2.70%3.20%Price Earnings Ratio33.538.734.4843.4Marker/Book11.10.891.2Firms Financial PositionLiquidity PositionThe liquidity ratios of the firm show an increasing year on year trend.
The current ratio for 2011 is at 2.5 which is much higher than that of the Industry Averages. The quick ratio, which is at par with the industry average and much more stable than the current ratio, indicates that much of the weight in the current ratio is held by the inventory.
This means that firm is operating unfavorably holding excess funds stuck in inventory. Activity PositionThe year on year similar inventory turnover trend indicates that the turnover of the firm is lower than the Industry Averages and does not fluctuating much. This supports the fact that excess is held in inventory by the firm without rotating it. The period for inventory collected computed is also higher than industry averages confirming that the firm faces problem when it comes to managing receivables.
On the other hand the ratios for fixed asset turnover and total asset turnover are also quite less than the Industry Averages. This depicts that the firm’s sales level does not spread fully enough to cover the assets. Debt PositionIt is observed over the years, that the firm is facing increasing debt ratio which is also much higher than the Industry Averages. This hints at the firm borrowing more each year for its business and operations.
Combined with the operating risk identifies above, the increasing level borrowing puts the firm at a financial risk position as well. Profitability PositionFrom the profitability ratios it was determined that the firm has a year on year favorable gross profit margin which shows an increasing trend and also depicts a positive result when compared with the lower Industry Averages. However when the Net profit margin for the firm is compared with the industry, it shows that it is much lower than the Industry Averages and depicts a decreasing year on year trend as well.
From the analysis it can be deduced that the lower net profit is due to the increased interest payments being made to creditors and for debt. Therefore overall the firm depicts a low level of profitability specially when compared to the Industry Averages. Market PositionThe market position of the firm is such that the market price depicts a fluctuating year on year trend with a drastic decrease in 2011. Comparing this to the Industry Averages also reveals that the company has a much lower market price in 2011 than the Industry Averages.
This depicts that the perception of the company in the market in terms of profitability is negatively impacting the market position of the firm. Martin Manufacturing: Financial Position Summary