Hampton Machine Tool Company (HMTC) is established in 1915, specialized in manufacturing tools for the automobile and the aircraft manufacturer. HMTC business has been extremely successful in the mid and late 60s. But in the mid-1970s, HTMC’s business had been considerably affected by the Arab oil embargo and ending of Vietnam War, which had turn down the automobile and aircraft industry. However, HMTC has survived through this hard time and its market share increased due to many thinly capitalized competitors had been forced out of the business. The company had been rebuilding of sales and they expecting 1979 will be the first year of capacity sales since 1972. HTMC main weakness is its lack of customer diversification. In fact, HMTC is highly exposure to the risk of automobile and aircraft industry.
Mr.Cowins, the president of the HMTC was widely respected in the business community as an energetic and successful executive. The company traditionally maintained a strong working capital position, which contributed to its survival and success in the poor economic condition. Low operating leverage may be useful when sale market is fluctuating, but conservative financial policy also should contributed to the poor performance on ROE, which is the main reason for redemption of the stock from several dissident shareholders; HMTC has rebuild its sales but is, unfortunately, not able to keep up with demand. The company currently has unfilled orders of $16,500,000, which accounts for 90% of annual capacity as of August 31. If they can’t fill these orders by the end of the year, it may disappoint its customers or sending a signal to the market that the company has severe management problems. ORDER
According to HMTC’s Income statement ending at August and my projection of the Balance Sheet and Income Statement from September to December. The HMTC’s financial performance projected in ratio as follows:
Operating Profit to Sales
Net Profit to Sales
As shown above, the overall profitability performance of HMTC is gradually increasing from August to December. There are a slightly decreases in almost all of profitability ratios in September, which due to the increase of work in progress about $1,320,000 in September. Overall HMTC has strong profitability. The operating profit to sales will gradually increase to 23.16% as HMTC’s engineering expected. When the company brings its inventories level back to normal and shipped the entire backlog, its ROE will increase from 26.69% to 43.58% and ROA will increase from 11.47% to 19.62% by the end of the year.
Table 1. Profitability Ratios (accumulated ending at each month)
Table 2. Liquidity Ratios
Although it is prefer to have current ratio as 2:1, HMTC performs well in term of liquidity. The current ratio eventually reaches at 2.43 as projection. Compare to the current ratio, the quick ratio seems not really good. Even at highest level in December, the quick ratio is only 0.95. According to my analysis, the inventory management and “made to order” business model is charged for this issue.
Table 3 Activity Ratios
Since HMTC purchase materials and sells products on term of net 30 days, both Days Receivable and Days Payable should close to 30 days. As we can see as above, HMTC’s Days Payable is eventually decreased to 22 days in December, but Days Receivable is very fluctuating during the period, which due to...