Mark X Case Answers
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
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