Part I.c – Summary of Observations Including Assessment of Business Risk
Based on the financial ratios calculated, it appears that Pinnacle Manufacturing (the “Company”) is both using up cash assets and increasing its debt. The Cash Ratio has declined each of the past three years indicating that the Company has a decreasing ability to pay its current liabilities from cash and will be required to liquidate assets to pay off current liabilities. The Current Ratio has also declined each of the last three years. In 2009, it was 218.6% or 2.186. This means that for every dollar of current liabilities the Company had $2.18 in current assets with which to pay those liabilities.
Inventory Turnover has declined from 4.04 times per year in 2009 to 3.78 times per year in 2011. This would seem to indicate that sales are slowing and inventory is not being sold as quickly as in prior years. This is further supported by the increasing Days to Sell Inventory number. In 2009 Days to Sell Inventory was 90.44 and had grown to 96.48 days in 2011. This makes it important to assess inventory obsolescence in light of these numbers.
Debt to Equity has increased significantly from 2009 to 2011. In 2009, the Debt to Equity Ratio was 70.81%. In 2011, it had grown to 96.48%. This might indicate that the Company does not have room to continue to borrow should it need cash to operate. If borrowing is not available as a financing tool, it is likely that the Company might need to look to its stockholders for additional cash or resort to more costly forms for financing.
Gross Profit Margins have declined from 29.51% in 2009 to 27.5% in 2011. This ratio is helpful analytically to indicate that possible misstatements might exist in the areas of sales, COGS, A/R and inventory. As noted above there is already a negative trend in inventory for the Company. Similarly, Profit Margin for the Company has declined from 3.77% to 2.84% between 2009 and 2011. A decline in...
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