Calculate a common size income statement and common size balance sheet. Is there anything worth noting based on this information? At 72. 99%, the cost to produce Martin Manufacturing Co’s products in terms of revenue dollars is really high. Martin Manufacturing generates 76 cents to cover interest and taxes for every dollar of sales. For net income, it looks like Martin Manufacturing is losing a little over 2 cents per sales dollar. b. Perform a financial summary of ratios using DuPont Analysis. This includes calculating ROE using the DuPont identity. Then analyze the ROE and its components relative to the industry.
The DuPont identity suggests that Martin Manufacturing is less asset efficient than the industry average. On top of that, Martin Manufacturing is not operating at an efficient level at all compared to the industry getting only 0. 0071 cents of every sales dollar. Martin Manufacturing Co. has used more debt than the industry average, but it seems that it has done more harm than good. Currently, Martin Manufacturing’s return on equity is not meeting or exceeding the industry average. c. Calculate the firm’s 2012 financial ratios, and then fill in the preceding table. Assume a 365-day year. ) d. Analyze the firm’s current financial position from both a cross-sectional and a timeseries viewpoint. Break your analysis into evaluations of the firm’s liquidity, financial leverage, asset management, profitability, and market value. Liquidity: The current and quick ratios have improved over the years and are higher than the industry average. The current ratio of 2. 5 tells us that the current assets should generate enough cash to cover the current liabilities coming due and keep the company out of short-term cash problems.
Since the current ratio is greater than one, the company may be holding too much cash. Financial leverage: The debt ratio shows that the Martin Manufacturing is well over 50% in debt, which means that they may be using a little too much debt compared to the industry average of 24. 5%. This may cause financial stress in the future since they may be unable to meet cash obligations. Asset management: As for the average collection period, there was no improvement year-over -year, and it is higher than the industry average.
The slower turnover suggests that the company may be holding large inventory. This runs the risk of not selling enough inventory due to too much supply and not enough demand. On the other hand, Martin Manufacturing is moving its inventory much faster than the industry average. They are generally using their assets to generate more revenue than the industry average. Profitability: Martin Manufacturing is generating 0. 70 cents from every sales dollar, which is lower than the industry average. It seems that the expenses of making the product is a bit higher than it should be.
The return on total assets is lower than the industry average which also demonstrates that the company may have some older equipment that may need replacing in the future. Market value: The company’s P/E ratio is lower than the industry average which means that they are not growing as fast as they should be. This may also suggest that the stock price is simply out of line with the firm’s earning potential. e. Summarize the firm’s overall financial position on the basis of your findings in part c and d.
The firm’s overall financial position is in an acceptable position. According to the current and quick ratios, the firm generates enough cash to cover current liabilities. However, they may run into some issues with cash coverage down the line because the company has a lot of debt. The profit margins are below the industry average, but they are not too far off so it is hard to tell how they will do in the long run. To sustain future business, the company will need to improve their market to book value, as well as, their ROA and ROE ratios.
