Mark X Case Answers

Topics: Financial ratios, Generally Accepted Accounting Principles, Balance sheet Pages: 5 (1686 words) Published: August 14, 2008
1.See Appendix A
2.Liquidity ratio. The firm’s liquidity shows a downward trend through time. The current ratio is decreasing because the growth in current liabilities outpaces the growth of current assets. The quick ratio is also declining but not as fast as the current ratio. From 1991 to 1992, it only decreased 0.35 units while the current ratio decreased 0.93 units. Looking at the common size balance sheet, we also see that the percentage of inventory is growing from 33% to 48% indicating Mark X could not convert its inventory to cash. Debt Ratios. Mark X’s debt management is also getting worse, increasing from 40% in 1990 to 59% in 1992. The growth of debt outpaces the growth of assets as seen in the debt ratio. The TIE is also decreasing. This implies that most of the earnings of the company go to the payment of interest and not for reinvestment. If this trend continues, Mark X may not be able to pay for its debts in the future. Efficiency Ratios. All of the efficiency ratios are bad. The inventory turnover shows a downward trend, which implies that the company is not able to sell their inventory, possibly because of the economic conditions. The decision to go for aggressive selling prices did not compensate for the downward demand. However, the fixed asset turnover shows an upward trend. For it to increase, the growth in sales should be greater than the growth in fixed assets. This implies that every addition of fixed asset yields more sales than its cost, meaning the investments are really worth it. This is the only single strength of Mark X. The total asset turnover is declining over time, meaning the growth of the assets outpaces the growth of sales. Since the growth of fixed assets outpaces sales but the growth of total assets is less than sales, we can say that the inventory and other current assets are the ones pulling Mark X down. The increasing days sales outstanding is also a bad sign. This means that the company is not able to collect their receivables in time. This is increasing because of the increasing percentage of receivables, meaning Mark X is either failing to collect its revenues or it is due to the increased credit line it imposed. Profitability Ratios. The profit margin ratio of Mark X is declining. This can be due to two things: either due to the decrease in selling price or to an increase in miscellaneous expenses. But because the gross profit margin is also declining at the same level (decrease of 3.05 units from 1991 to 1992), the decline in the profit of Mark X can be traced to the strategy of decreasing prices to attract more sales. The return on total assets decreases over time. This means that the total assets of Mark X increases over time but the earnings do not increase. This implies that most of the earnings of Mark X are used to pay the expenses and not for reinvestment. The declining ROE is also something to worry about. The earnings per dollar of share declined from 28.26% to 1.96%. Du Pont analysis shows further that the both decreasing asset turnover and profit margin contribute to the dwindling ROA. However, the decrease in profit margin contributes more because it goes down at a much faster rate. This may have been caused by the change in selling policies Mark X undertook. Du Pont analysis also shows that both debt ratio and ROA contributed to the decrease in ROE. However, the decrease in ROA contributes more because it dropped more dramatically than debt ratio, which means problems really arose during the recession which forced Mark X to change its policies on sales. 3.Based on our analysis to this point (year 1992), the bank should not lend the requested money to Mark X. This is because, judging from their data’s ratio analysis, the company is generally weakening both in liquidity and leverage. According to the liquidity ratios, the company’s ability to lay its hands on cash is not only very low but also getting worse. Take note that a high...
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