Memorandum

To:

The management team at Marine Supply Company

CC:
From: Diego Alonso
Date: 1/23/2013
Re:

Financial Analysis of Marine Supply Co.

After reviewing the financial statements your company has provided I have
formed an analysis and assessed your companys performance based on my review
of various financial ratios.
Over the past 4 years Marine Supply Company (MSC) has been increasing its
usage of debt which has been hurting its performance. This is especially evident
when we look at the times interest earned ratio which has fallen from nearly 3 times
the industry average (24.3x) to 5.3x which is well below the average of 8.6x. This is
due to an increase in interest expense as a result of increased usage of long term debt
as is shown on the balance sheet. This increase in long term debt is probably caused
by the increased investment in fixed assets as is shown when looking at the Fixed
Assets to Net Worth ratio. This ratio has been steadily climbing since Year 1 from a
below average 39.29% to an above average 51.28%. This increased investment in
fixed assets means the company is more leveraged and therefore becomes a more
risky operation. I suggest that the management team try to liquidate some of their
fixed assets in an attempt to relieve some of the companys long term debt.
1

November 1, 2015

In addition to the debt problem, MSC could benefit from a reduction in

collection period. As you can see in the attached data sheet, the Collection period of
Marine Supply Company has been increasing over the last 4 years and has strayed
farther and farther away from the industry average. This increase in collection
period is unfavorable for the company and is not only reducing the quantity of
working capital but also the quality. This is evident when looking at the receivables
to working capital ratio which in this case has increased from 40.41% in Year 1 to
50.08% Year 4 due to the increase in receivables and is now above the industry
average of 44.90%. This represents a fairly poor quality of current assets in
comparison to the industry average. Furthermore, the increase in collection period
makes the company more vulnerable to uncollectable receivables that must be
written off as bad debt. Lastly, this high amount of receivables is most likely forcing
MSC to use debt to make up for uncollected receivables which is causing interest
expense to go up once again as mentioned in the first paragraph. To bring the
collection period closer to the industry average I would recommend either
shortening MSCs credit terms or following a more systematic collection procedure
to push customers to pay on time.
By addressing the issues mentioned above and taking action according to my
recommendations, I believe that Marine Supply Company will see improved profit

November 1, 2015

margins, more efficient management of their working capital, and an overall lower
risk level in their operations in the years to come.
Addendum
I believe that the management team at Marine Supply Co. is relatively young due to
their fairly risky decision making. Choosing to run MSC as a high leverage and
high debt firm is a very risky and aggressive decision that I believe is more
characteristic of a young manager in his late 20s or early 30s.