The liquidity ratios of the firm are slightly below the industry averages. This is due to inventory and accounts receivable making up a significantly larger portion of the current assets than cash and marketable securities. This may be indicative of a problem with inventory management and/or collection on accounts. Asset Management Ratios With this company the inventory management ratios further indicate that there may be an issue with inventory and inventory controls. The inventory turnover ratio is lower than the industry average and the days’ sales in inventory are high.
A company wants to turn inventory quickly to reduce storage costs, and Garners’ does not achieve this. The accounts receivable management ratios show a collection period that’s 9 days lower than the industry average. This is a sign of good management as the company wants to collect payment as quickly as it can. The company might be too tight with its crediting terms, and can possibly look at relaxing its crediting policy a little. The accounts receivable turnover ratio is 4. 49 which further show that the company has an efficient collection system in place.
The average payment period for the company is 34 days higher than the industry average. The accounts payable turnover is 2. 73. So long as the company is paying its debt on time, this shows that the company is minimizing opportunity costs through proper debt management. It is beneficial for a firm to pay debt on time but not necessarily early. When looking at the fixed asset ratio it is . 4 below industry average and the sales to working capital ratio is nearly the same. In looking at the company there may be issues with whether management is making full use of its assets.
Considering the total asset management ratio is slightly higher than industry average, it shows that it is using its assets correctly. The capital intensity ratio shows that the dollars of assets needed to produce sales for the company is below the industry average, and again shows that assets are being used well. The sales to working capital ratio show that the company’s management is running the firm well. Debt Management Ratios The company’ has a debt ratio at 56% which is above the industry average, and debt to equity ratio is higher than the industry average as well.
The equity multiplier is also a little above the industry average. The cash flow available to stockholders is increased; however, the company may not be making the best decisions in balancing the use of debt and equity. Using more equity in financing puts the firm at risk of being unable to make its debt payments. This can be an issue to look at and see about improving. The times interest earned ratio and cash coverage ratio are both higher than industry average. This high ratio means that more equity and less debt are used in financing.
The level of debt can lead to decrease in return for stockholders due to the increased use of equity. The Company may need to look at increasing the use of debt of the short term and possibly longer term. Profitability Ratios The profit margin and basic earnings power ratio are more than 6% above industry average which shows that the company is earning profit better than the industry. Additionally the ROA and ROE both show that the company has a healthy profit margin. Dividend payout as well shows that the company is performing above industry expectations.
Which in analysis can lead an investor to believe that the company is profitable but not in a very efficient way. It is carrying some measure of risk. Market Value Ratios When looking at these measures we see the company performing at nearly the level of the industry. This is good for the company, however if the company was more efficient with its finances it could be better than the industry. DuPont Analysis of Garners Platoon Mental Health Care Inc. Using the DuPont analysis we get the following results Profit margin is 27%, hich is a measure of operating efficiency. Next is Asset turnover with . 55 times which is a measure of the efficiency of asset utilization. Finally the equity multiplier with 2. 26 which is a measure of financial leverage of the firm. When compared to the traditional ratios we get similar results; Profit margin 25. 44% (27% DuPont) versus 18. 75% industry average. Asset turnover is . 54 (. 55 DuPont) versus . 50 industry average. Equity multiplier 2. 28 times (2. 26 times DuPont) versus 2 times industry average.
The results show that the DuPont analysis using ROE as the main determinant are very similar to the regular ratios. Furthermore the ROE of the traditional ratio is 31. 32% with DuPont being 33. 10% versus the industry average of 18. 75% shows that the firms ROE is very robust. While the firm has some challenges with respect to liquidity and inventory management, as well as debt management it still is doing a good job with respect to its shareholders. However it could be doing a little better for the stockholders, and needs to address some of the above issues mentioned.