Assessing Martin Manufacturings Current Financial Position

1) Calculate the firms 2009 financial ratios, and then fill in the preceding table. (Assume a 365day year)
Martin Manufacturing Company
Historical and Industry Average Ratios
Ratio
Current Ratio
Quick Ratio
Inventory Turnover (times)
Average Collection Period
Total Asset Turnover (times)
Debt Ratio
Time Interest Earned Ratio
Gross Profit Margin
Net Profit Margin
Return on Total Assets (ROA)
Return on Equity (ROE)
Price/Earnings (P/E) Ratio
Market/Book(M/B) Ratio

Actual
2007
1.7
1.0
5.2
50.7 days
1.5
45.8%
2.2
27.5%
1.1%
1.7%
3.1%
33.5
1.0

Actual 2008

Actual 2009

1.8
0.9
5.0
50.8 days
1.5
54.3%
1.9
28%
1.0%
1.5%
3.3%
38.7
1.1

2.5
1.4
5.3
58.0
1.6
57%
1.6
27%
0.7%
1.1%
2.6%
34.48
0.88

Industry
Average 2009
1.5
1.2
10.2
46 days
2.0
24.5%
2.5
26%
1.2%
2.4%
3.2%
43.4
1.2

a) Current Ratio
$ 1,531,181
=2.5
$ 616,000
b) Quick Ratio
$ 1,531,181$ 700,625
=1.3
$ 616,000
c) Inventory turnover (times)
$ 3,704,000
=5.3
$ 700,625
Comment: 2007 and 2008 current ratio at 5.2 and 5.0 respectively were considered the
worst compared to 2009. However, when compared to industry average, it is below the
average. This shows the company is having a problem to sell their product or they are
holding the inventory for too long.
d) Average collection period (days)

$ 805,556
=58.0 days
$ 5,075,000
(
)
365
Comment: The average collection period has increase over the years however in 2009
there is a significantly increase to 58.0 days compared to industry average at 46.0 days.
This shows that the company is taking longer time to collect its debts from debtors and
poorly managed credit or collection department or both.
e) Total asset turnover (times)
$ 5,075,000
=1.6
$ 3,125,000
f) Debt Ratio
$ 1,781,250
=57
$ 3,125,000
Comment: The company is having the highest debt ratio in 2009 at 57% compared to
2007 at 45.8% and 2008 at 54.3% and also the highest when compared to industry
average at 24.5%. This shows the company is taking high risk on its financial leverage
and financial risk then other firms in the industry. It will leads to bankruptcy and having
less cash to cover its expenditure.
g) Times interest earned
$ 153,000
=1.6
$ 93,000
h) Gross profit margin
$ 1,371,000
=27
$ 5,075,000
i) Net profit margin
$ 36,000
=0.71
$ 5,075,000
j) Return on total assets
$ 36,000
=1.2
$ 3,125,000
k) Return on equity
$ 36,000
=2.7
$ 1,343,750

l) Price/Earnings (P/E) Ratio

Type equation here .
m) Market/Book (M/B) Ratio
Type equation here .
2) Analyse the firms current financial position from both a cross-sectional and a time-series
viewpoint. Break your analysis into evaluations of the firms liquidity, activity, debt,
profitability, and market.
a) Liquidity Ratio
i) Time-series analysis
The firms ability to pay its current liabilities out of its current assets has increased,
reducing its short term liquidity risk or the chance of being technically insolvent.
Even though its quick ratio is lowest in 2008, there is a significant upward trend in
quick ratio in 2009.
ii) Cross-sectional analysis
The firms liquidity ratios are significantly higher than the industry average,
indicating it has excessive investment in current assets and thereby it is avoiding
unnecessary liquidity risk and sacrificing chances of getting additional return
b) Activity Ratio
i) Time-series analysis
The firms inventory turnover and total asset turnover are stable, but its average
collection period has increased over the years. There is a symptom of collection
problem due to increase of average collection period.
ii) Cross-sectional analysis
Inventory turnover is significantly lower than the industry average indicating the firm
held too much of inventory relative to its sales. The average collection period is
higher than the industry average which indicates that firm has collection problem or
the firm provides too much flexible credits than typical firm in the industry and
eventually the firm is sacrificing its return. Total asset turnover is significantly lower
than industry average. Compared to the typical firm in the industry, the sales volume
is not sufficient for volume of committed assets as indicated by its low total asset
turnover.
c) Debt Ratio
i) Time-series analysis
Over the years, the firm is getting more levered and thus placing itself at higher
financial risk. On the other hand, its time interest earned ratio has decreased over the
year which indicates that firm ability to service debt has decreased. The firm may face
higher financial risk due to the firms decrease trend of time interest earned ratio and
increase trend of debt ratio.
ii) Cross-sectional analysis

The debt ratio of the firm is much higher than that of average firms in the industry.
This means that the financial leverage and financial risk taken by the firm is much
higher than that of taken by the typical firm in the industry. Firms time interest
earned ratio is lower than the industry average. So the financial risk taken by the firm
is also fuelled by its low time interest earned ratio which eventually may lead the firm
toward dangerous situation.
d) Profitability Ratio
i) Time-series analysis
The Gross Profit Margin is good but Net Profit Margin, Return on Asset (ROA) and
Return on Equity (ROE) are deteriorating. The deterioration due to increase trend of
financial leverage and current asset.
ii) Cross-sectional analysis
The firms gross profit margin is higher than industry average. But its ROA, ROE and
net profit margin are significantly lower than average firms in the industry. Lower
return maybe due to higher financial leverage and excessive current assets used by the
firm than that of used by the typical firms in the industry.
e) Market Ratio
i) Time-series analysis
Both price/earnings (P/E) and market/book (M/B) ratios are getting worse over the
years indicating investors are losing confidence in the firm.
ii) Cross-sectional analysis
The P/E ratio and M/B ratio of the firm compared to typical firms in the industry
indicates that investors have lower confidence on the firm than on the average firm in
the industry. The investors may perceives that there is uncertainty in the firms ability
to earn future profit.

Recommendation
1) The company needs to setup a fix credit term for its customers and facilitate those who
requires more time to pay while maintaining the good relationship. The company may also
refuse future business deals with adamant customers who refuse to pay the debt.
2) The company require to improve its assets and cash management as debt ratio, average
collection ratio and time-interest ratio indicates that there might exist issues with its cash
management.