Case Study: Martin Manufacturing Company

Topics: Financial ratios, Asset, Generally Accepted Accounting Principles Pages: 3 (725 words) Published: December 12, 2012
A.
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| 55.8 days| 58 days| 46 days| Total asset turnover(times)| 1.5| 1.5| 1.6| 2.0|
Debt ratio| 45.8%| 54.3%| 57%| 24.5%|
Times interest earned ratio| 2.2| 1.9| 1.6| 2.5|
Gross profit margin| 27.5%| 28.0%| 27%| 26.0%|
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 common 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.
Liquidity
Current ratio in 2004 is 1.7 and in 2005 1.8 . In 2006, the current ratio is increasing in trend and there is a big difference between 2005 and 2006 years. This may be caused by increase in current assets and decrease in current liabilities. It means that the company is not defending much on loans and credits advances to finance its operations. Also company is very liquid. But a very liquid condition means sometimes low profitability. The firm has normal quick ratio. In 2005 it is decreasing but in 2006 it’s increasing. It is because of decrease in the company’s current liabilities in 2006. The company has ability to meet its current liabilities using its most liquid assets. It is recommended to have a quick ratio of 1.0. Comparing to the situation of the industry, the company is in quite a good position. As for the time-series analysis, it remains stable during these three years.

Activity
Martin Manufacturing Company’s Inventory management seems to be stable in...
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