Avery Case Solution

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1. Calculate the key financial ratios for Avery Products, Inc., for each year and ratio suggested in the case’s industry averages. Analyze the trends for each ratio.

2. What strengths and weaknesses are revealed by the ratio analysis? • Quick Ratio: The ratio is declining which reflects higher liabilities and cash flow problems of the company • Current Ratio: The ratio is declining which means that Avery is having problems with liquidity. • Inventory Turnover: The ratio is increasing which shows that Avery has liquidity problems since their inventories are not moving fast enough. • Average Collection Period: The ratio is increasing which shows that Avery has problems with collecting on accounts receivables. • Fixed Asset Turnover: The industry average is 13 and so Avery is almost on par with the industry average. • Total Asset Turnover: Here the ratio is declining which reflects lower sales and hence lower receivables. • Return on Total Asset: The ratio is declining which means higher cost of goods sold. • Return on Net Worth: The ratio is declining which shows net income is much lower than the liabilities. • Debt Ratio: The ratio is increasing but is still below industry average. • Profit Margin on Sales: The ratio is declining which reflects lower profit margin on sales.

3. What amount of internal funds would be available for the retirement of the loan? If the bank were to grant the additional credit and extend the increased loan from a due date of February 1, 1997, to June 30, 1997, would the company be able to retire the loan on June 30, 1997? Ans)

Additional revenue generated from matching industry for inventory turnover

Sales/Inventory= Inventory Turnover

2900000/Inventory= 7 (industry inventory turnover avg)

Inventory= $ 414,286

Previous Inventory= $ 826,200

Hence savings generated from reducing ending inventory will lead to freeing up of cash as mentioned below-

Savings= Previous Inventory-...
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