Assessing Martin Manufacturing’s Current Financial Position
Case: Assessing Martin Manufacturing’s Current Financial Position
Martin Manufacturing Company
Historical and Industry Average Ratios Ratio | Actual 2004 | Actual 2005 | Actual 2006 | Industry Average 2006 | Current Ratio | 1.7 | 1.8 | 2.5 | 1.5 | Quick Ratio | 1.0 | 0.9 | 1.4 | 1.2 | Inventory Turnover (times) | 5.2 | 5.0 | 5.3 | 10.2 | Average Collection Period | 50.7 days | 50.8 days | 58.0 days | 46 days | Total Asset Turnover (times) | 1.5 | 1.5 | 1.6 | 2.0 | Debt Ratio | 45.8% | 54.3% | 57% | 24.5% | Time Interest Earned Ratio | 2.2 | 1.9 | 1.6 | 2.5 | Gross Profit Margin | 27.5% | 28% | 27% | 26% | Net Profit Margin | 1.1% | 1.0% | 0.7% | 1.2% | Return on Total Assets (ROA) | 1.7% | 1.5% | 1.1% | 2.4% | Return on Equity (ROE) | 3.1% | 3.3% | 2.6% | 3.2% | Price/Earnings (P/E) Ratio | 33.5 | 38.7 | 34.48 | 43.4 | Market/Book(M/B) Ratio | 1.0 | 1.1 | 0.88 | 1.2 |
B. Analyze the firm’s current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt, profitability, and market.
Liquidity Ratio
Time series analysis:
The firm has increased its ability to pay its current liabilities out of its current assets; therefore it has to reduce its short term liquidity risk or the chance of being insolvent. Though its quick ratio is lowest in 2008, there is still an increase in trend of 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 therefore is avoiding unnecessary liquidity risk and sacrificing chance of getting additional return. Activity Ratio
Time series analysis:
Firm’s inventory turnover and total asset turnover are stable, but its average collection period has increased over the years. The increasing trend of average
Martin Manufacturing Company
Historical and Industry Average Ratios Ratio | Actual 2004 | Actual 2005 | Actual 2006 | Industry Average 2006 | Current Ratio | 1.7 | 1.8 | 2.5 | 1.5 | Quick Ratio | 1.0 | 0.9 | 1.4 | 1.2 | Inventory Turnover (times) | 5.2 | 5.0 | 5.3 | 10.2 | Average Collection Period | 50.7 days | 50.8 days | 58.0 days | 46 days | Total Asset Turnover (times) | 1.5 | 1.5 | 1.6 | 2.0 | Debt Ratio | 45.8% | 54.3% | 57% | 24.5% | Time Interest Earned Ratio | 2.2 | 1.9 | 1.6 | 2.5 | Gross Profit Margin | 27.5% | 28% | 27% | 26% | Net Profit Margin | 1.1% | 1.0% | 0.7% | 1.2% | Return on Total Assets (ROA) | 1.7% | 1.5% | 1.1% | 2.4% | Return on Equity (ROE) | 3.1% | 3.3% | 2.6% | 3.2% | Price/Earnings (P/E) Ratio | 33.5 | 38.7 | 34.48 | 43.4 | Market/Book(M/B) Ratio | 1.0 | 1.1 | 0.88 | 1.2 |
B. Analyze the firm’s current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt, profitability, and market.
Liquidity Ratio
Time series analysis:
The firm has increased its ability to pay its current liabilities out of its current assets; therefore it has to reduce its short term liquidity risk or the chance of being insolvent. Though its quick ratio is lowest in 2008, there is still an increase in trend of 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 therefore is avoiding unnecessary liquidity risk and sacrificing chance of getting additional return. Activity Ratio
Time series analysis:
Firm’s inventory turnover and total asset turnover are stable, but its average collection period has increased over the years. The increasing trend of average