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Case - Assessing Martin Manufacturing’s Current Financial Position

Case - Assessing Martin Manufacturing’s Current Financial Position

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Published by M B Hossain Raju
Ratio Analysis Financial Management Case: Assessing Martin Manufacturing’s Current Financial Position Martin Manufacturing Company Historical and Industry Average Ratios Ratio Current Ratio Quick Ratio Inventory Turnover (times) Average Collection Period Total Asset Turnover (times) Debt Ratio Time Interest Earned Ratio Gross Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE) Price/Earnings (P/E) Ratio Market/Book(M/B) Ratio Actual 2007 1.7 1.0 5.2 50.7 days 1.5
Ratio Analysis Financial Management Case: Assessing Martin Manufacturing’s Current Financial Position Martin Manufacturing Company Historical and Industry Average Ratios Ratio Current Ratio Quick Ratio Inventory Turnover (times) Average Collection Period Total Asset Turnover (times) Debt Ratio Time Interest Earned Ratio Gross Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE) Price/Earnings (P/E) Ratio Market/Book(M/B) Ratio Actual 2007 1.7 1.0 5.2 50.7 days 1.5

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Published by: M B Hossain Raju on May 28, 2012
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Ratio Analysis Financial Management Case: Assessing Martin Manufacturing’s Current Financial Position Martin Manufacturing Company Historical

and Industry Average Ratios Ratio Current Ratio Quick Ratio Inventory Turnover (times) Average Collection Period Total Asset Turnover (times) Debt Ratio Time Interest Earned Ratio Gross Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE) Price/Earnings (P/E) Ratio Market/Book(M/B) Ratio Actual 2007 1.7 1.0 5.2 50.7 days 1.5 45.8% 2.2 27.5% 1.1% 1.7% 3.1% 33.5 1.0 Actual 2008 1.8 0.9 5.0 50.8 days 1.5 54.3% 1.9 28% 1.0% 1.5% 3.3% 38.7 1.1 Actual 2009 2.5 1.4 5.3 58.0 1.6 57% 1.6 27% 0.7% 1.1% 2.6% 34.48 0.88 Industry Average 2009 1.5 1.2 10.2 46 days 2.0 24.5% 2.5 26% 1.2% 2.4% 3.2% 43.4 1.2

b) Liquidity Ratio Time series analysis:

The firm has increased its ability to pay its current liabilities out of its current assets; thereby it has reduced its short term liquidity risk or the chance of being technically insolvent. Though its quick ratio is lowest in 2008, there is an upward trend in quick ratio as well. Cross sectional analysis: Firms’ liquidity ratios are significantly higher than the industry average which indicates that it has excessive investment in current assets and thereby it is avoiding unnecessary liquidity risk and sacrificing chance of getting additional return.

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So the financial risk taken by the firm is also fueled by its low time interest earned ratio which eventually may lead the firm toward dangerous situation. The increasing trend of average collection period indicates a The firm is getting more levered over the years and thereby placing itself at higher financial risk. Firm’s time interest earned ratio is lower than the industry 2 . the sales volume is not sufficient for volume of committed assets as indicated by has increased over the years. The decreasing trend of time interest earned ratio and increasing trend of debt ratio may lead the firm toward high financial risk.Ratio Analysis Financial Management Activity Ratio Time series analysis: Firm’s inventory turnover and total asset turnover are stable. Cross sectional analysis: The debt ratio of the firm is much higher than that of average firm in the industry. Total asset turnover is significantly lower than industry average. the typical firm in the industry. That means. which is an indicator of too much inventory held by the firm relative to its sales. On the other hand. Debt Ratio Time series analysis: the industry. Vis-à-vis the typical firm in its low total asset turnover. but its average collection period symptom of collection problem. the financial leverage and financial risk taken by the firm is much higher than that of taken by average. The average collection period is higher than the industry average which indicates that firm has collection problem or firm provides too much flexible credits than typical firm in the industry and eventually it is sacrificing return. Cross sectional analysis: Inventory turnover is significantly lower than the industry average. its time interest earned ratio has decreased over the year which indicates that firm ability to service debt has decreased.

Cross sectional analysis: The firm’s gross profit margin is higher than industry average. fails to generate appropriate level of sales. Assets. high interest associated with large debt is depressing it profitability. Investors have lower confidence on Martin Company. 3 . C) Martin manufacturing has high liquidity ratio which is due to its excessive investment in current assets.Ratio Analysis Financial Management Profitability Ratio: Time series analysis: The Gross profit margin is stable but Net Profit Margin. Therefore. Market Ratio: Time series analysis: Equity (ROE) are deteriorating.s ability to earn future profit will face more and increasing uncertainty. 57% of which financed by liabilities. as they perceive that Martin. But its ROA. This lower return might be due to higher financial leverage and excessive current assets used by the firm than that of used by the typical firm in the industry. ROE and net profit margin are significantly lower than that of typical firm in the industry. The increasing trend of financial leverage and current asset can Both price/earnings (P/E) and market/book (M/B) ratios are getting worse over the years. Return on Asset (ROA) and Return on be blamed for this deterioration. These problems are being identified by the investors which are reflected in company’s weak market ratio. High investment in current assets is represented by its low inventory turnover. This indicates that company is losing investors’ confidence upon it. low total asset turnover and high average collection period. Cross sectional analysis: The comparison of the P/E ratio and M/B ratio of the firm with the typical firm in the industry indicates that investors have lower confidence on the firm than on the average firm in the industry.

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