You are on page 1of 8


Memo: Simpson
Manufacturing Ratio
Ratios Utilie !ec" #$% &'$& !ata
Simpson Manufacturing Co
To: (aren Colonias
!ate: )*$*&'$#
Re: Ratio Analysis Utiliing !ec" &'$& !ata
Simpson Manufacturing Co. began making structural connectors in 1956 and
today is an international company that manufactures many different products for use in
construction, retro-fitting, and do it yourself homeoners and small business
entrepreneurs. !he manufacturing industry typically in"ol"es a plant or factory utili#ing
machines to turn ra materials into finished products to be used by the end consumer.
!hroughout our 56 years in e$istence e ha"e had numerous financial ups and
dons. !here are three analytical techni%ues that are most commonly used to compare
and analy#e financial statements. !hey are& hori#ontal analysis, "ertical analysis, and
ratio analysis' ratio analysis is the main focus of this memo. ( hori#ontal analysis of
financial statements pro"ides dollar and percentage changes of financial accounts, o"er
time, hich allos the analyst to look for trends and consumer patterns o"er years in
order to make any necessary changes to ma$imi#e profits. ( "ertical analysis of financial
statements instead focuses on relations among financial accounts o"er periods of time.
)ercentages of change are calculated for indi"idual accounts o"er many years and a
common si#e financial statement is prepared. !his also enables a financial analyst to spot
trends and changes that ha"e occurred hile pro"iding a starting point to disco"er if there
as any underlying reason for a significant change *+arrison ,-1,.. ( ratio analysis
allos for a %uick "ie of Simpson Manufacturing/s financial performance in key areas.
!his ratio analysis is primarily focused on financial data pro"ided in the ,-1, annual
report *Simpson ,-10. hich ended 1ecember 01, ,-1,. 2 ill be discussing the
calculated ratios and hat each means regarding the financial performance of Simpson
Manufacturing. 2 ill also pro"ide my recommendations for impro"ement.
!he gross profit margin ratio is one look at a business3s financial status. 2t shos
ho efficiently a company/s production processes are and also shos a glimpse of ho
efficient pricing and cost are for the company. !he ratio is calculated by taking +ross
profit and di"iding it by income, then e$pressing it as a percentage. Simpson
Manufacturing Co. has a "ery high gross profit margin of 40.456 hich means they
retain a significant amount on each dollar of sales hich can be utili#ed to co"er
operating e$penses or it ill become gross profit. Simpson/s gross profit margin is
significantly higher than the industry a"erage of ,56 - 056 *Morgan ,-10..
Common stockholders of Simpson Manufacturing Co. can assess financial
performance of the company by utili#ing se"eral ratios. !he price-earnings ratio, hich is
calculated using the market price per share and di"iding by earnings per share. Simpson/s
)78 ratio ith e$traordinary items is 05.91. !his means that the stock is selling for about
05.91 times its current earnings per share. !his high number shos that in"estors are
illing to pay high-ticket prices per share because of the groth potential of the
company. Simpson/s )78 ratio of 05.91 is much higher than the industry a"erage of ,0.,-
*:(S1(; ,-10.. !he return on total assets ratio measures operating performance and is
calculated as shon& :et income < =2nterest e$pense $ *1- !a$ rate.> di"ided by ("erage
total assets. Simpson/s ?@( ratio is 4.566 hich means management earned an almost
fi"e percent return through utili#ation of Simpson/s assets. !he return on e%uity ratio
shos ho ell Simpson generates groth from stockholder e%uity. !he ratio is
calculated using :et income minus any )referred di"idends and then di"iding by ("erage
total stockholders/ e%uity minus any ("erage preferred stock. Simpson/s ?@8 is 5.4,6,
hich falls beteen +riffon/s ?@8 of 06 and (pogee/s ?@8 of 66 *:(S1(; ,-10..
Managers can use this ratio to monitor changes in income from business acti"ities, or see
ho much of a company3s net orth is tied up in its fi$ed assets and liabilities.
Short term creditors such as suppliers look at cash flo ratios to ensure that
Simpson has the cash a"ailable in order to pay them on time. !hese ratios look at hether
or not a company has enough assets to co"er their short term financial commitments. !he
current ratio is calculated by taking current assets and di"iding by current liabilities.
Simpson/s current ratio is 5.,1 hich is significantly higher compared to competitors
)+!A4.- and +riffonA0.-,. !he %uick ratio takes into account the fact that in"entory
might not be able to be turned into cash that fast. 2t is calculated by taking !otal current
assets and subtracting in"entory and di"iding by !otal current liabilities. Simpson/s %uick
ratio is 0.-5' hich shos that e"en ithout including in"entory Simpson Manufacturing
can still ade%uately co"er their short term commitments. 2n"entory turno"er ratio
measures ho many times a company/s in"entory has been bought and produced through
the year. 2t is calculated by taking Cost of goods sold and di"iding it by ("erage
in"entory balance. Simpson/s in"entory turno"er is 1.50, hich is significantly loer
than the in"entory turno"er rate of competing companies including& +riffon hose
in"entory turno"er rate is 5.50 and (pogee 8nterprises hose turno"er rate is 15.5
*:(S1(; ,-10.. !otal asset turno"er ratio looks at ho ell a company uses its assets
to generate sales, and is calculated by taking :et sales and di"iding it by !otal assets.
Simpson Manufacturing/s total asset turno"er ratio is .96 hich could indicate an issue
ith one or more of the asset accounts. 2t is normal for manufacturing companies to ha"e
lo asset turno"er ratios but Simpson/s in %uite lo hen compared to (pogee
8nterprises that has an asset turno"er ratio of 1.05 and +riffon hose ratio is 1.-0
*:asda% ,-10..
1ebt ratios attempt to measure a company/s amount of financial debt and see ho
ell the company ill be able to a"oid financial difficulties, financial distress, and e"en
bankruptcy. !hey sho ho much of the company/s assets are financed through debt.
!he debt ratio is calculated by taking !otal liabilities and di"iding it by !otal assets.
Simpson/s debt ratio is 11.0,6 hich is a "ery lo percentage of le"eraged debt
compared to assets, hich carries a strong e%uity position. 2n comparison, (pogee/s debt
ratio is 05.96 and +riffon/s debt ratio is 60.56 *:(S1(; ,-10., both are immensely
higher than Simpson/s. !he debt to e%uity ratio measures the amount of borroed debt
for each dollar of assets pro"ided by stockholders. 2t is calculated by taking !otal
liabilities and di"iding it by Stockholders/ e%uity. Simpson/s debt to e%uity ratio is .-,,
hich is "ery good because it shos that they ha"e a "ery lo amount of debt especially
hen compared to competitors (pogee and +riffon hose debt to e%uity ratios are .56-
and 1.96 respecti"ely *:asda% ,-10..
Bpon completing ratio analysis for Simpson Manufacturing Company, 2 ha"e
come to the folloing conclusions and recommendations. !he company has been able to
sustain groth throughout the years despite ha"ing good %uarters and bad %uarters. !here
is alays room for impro"ement, efficiency optimi#ation, and profit ma$imi#ation
regardless of outcomes of satisfactory ratios based on comparisons ith industry leaders.
!he folloing ratios for Simpson Manufacturing Co. are considered satisfactory& +ross
)rofit Margin ?atio, )78 ?atio, Current ?atio, ;uick ?atio, 1ebt ?atio, and 1ebt to
8%uity ?atio. (s 2 mentioned there is alays room to impro"e unless you are at 1--6
+ross )rofit. !he ?@( and ?@8 ?atios are comparable to competitors/ ratios but 2
belie"e that management could look into making operations run more efficiently and
generating more sales utili#ing stockholders e%uity, respecti"ely. Simpson Manufacturing
needs to sei#e ne business markets and also take their products orldide in order to
ma$imi#e profit potential. !he 2n"entory !urno"er ?atio is substantially loer than
competitors at 1.50. !his should be e$amined further by management to see if in"entory
is being o"erstocked to a point here most of the in"entory ne"er gets sold. Simpson
Manufacturing may ant to e$plore the C2! in"entory method, hich could ease the
amount of money currently being spent on rent and arehouses that hold the
o"erabundance of in"entory. !he !otal asset !urno"er ?atio is .95, hich can be
considered normal in the manufacturing industry but is significantly loer compared to
competitors (pogee and +riffon. Simpson Manufacturing is not efficiently utili#ing their
assets to generate sales. 2n order to impro"e their bottom line, Simpson Manufacturing
Co. needs to pay attention to trends such as& eather related natural disasters can be
minimi#ed through impro"ing construction practices and the materials that are utili#ed.
)aying attention to industry knoledge, technological ad"ances, and customer feedback
are ays to impro"e product de"elopment and in"ent ne products to meet consumer
needs. (lso, the green trend has become an important mo"ement in today/s society.
Simpson Manufacturing Co. currently purchases engineered ood products due to the
shortage of natural ood. Continuing to pay attention and shift focus as trends become
apparent ill be key to the success and financial groth of the company.
+arrison, ?. D., :oreen, 8. E., F Greer ). C. *,-1,.. Managerial Accounting. :e
Hork& Mc+ra-Dill72rin.
Morgan, ?ichard. *,-10.. !he ("erage Manufacturer3s +ross )rofit )ercent. Chron.
?etrie"ed from http&77smallbusiness.chron.com7a"erage-manufacturers-gross-
:(S1(;. *,-10.. (nalyst Summary. ?etrie"ed from
Simpson Manufacturing Co. *,-10.. ,-1, (nnual ?eport. ?etrie"ed from