Martin Manufacturing Company – Vertical Analsis
Essay Preview: Martin Manufacturing Company – Vertical Analsis
Report this essay
Martin Manufacturing Company
Historical Ratios
RATIOS
ACTUAL 2001
ACTUAL 2002
ACTUAL 2003
INCREASE
(DECREASE)
INDUSTRY
AVERAGE
Current ratio
Quick Ratio
Inventory turnover (times)
10.2
Average collection period (days)
46.0
Total asset turnover (times)
Debt Ratio (%)
24.5
Times interest earned ratio
(0.3)
Gross profit margin (%)
(1.0)
26.0
Net profit margin (%)
(0.4)
Return on total assets (ROA %)
(0.4)
Return on common equity (ROE %)
(0.8)
Price / earning (P/E) ratio
(4.2)
43.4
Market/ book (M/B) ratio
(0.2)
Analysis
Liquidity:
The current ratio and quick ratios for the year 2003 are at 2.5 and 1.3, which are both higher than the industry average. The company has enough to cover short term bills and expenses. Both the current and quick ratios are showing an upward trend compared to 2001 and 2002. The current assets decreased by $ 20,264 to $ 1,531,181 and the current liabilities also decreased considerably by $255,402 to $616,000, a 29.3% decline, thus making the current ratio jump to a 2.5. The biggest decline was seen is accounts payable which decreased by $170,500 to $230,000, a decline of 42.6 %.
Activity:
The inventory turnover is almost half compared to the industry average, although it managed to increase by 0.3 compared to 2002. The company needs to maintain a constant cost of goods sold and at the same time manage inventory more efficiently to maintain market competitiveness. The average collection period also increased slightly to 58 days, three days increase compared to 2002. The company needs to negotiate or persuade on efficient payment methods to customers to decrease the collection period down to industry average. The total asset turnover increased 0.1 to 1.6 but still failing to meet the industry standard of 2.0. Martin Manufacturing needs to boost sales while maintaining a constant asset value to meet or exceed industry standards.
Debt:
The debt ratios increased by 2.7% to 57% more than double the industry standard of 24.5%. The long term debt increased from $700,000 to $ 1,165,250 an increment of 66.5% in the year 2002. The company is currently highly leveraged thus it needs to work