Avery Products
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This case is dealing with company called Avery Products which is producing its products in jewelry manufacturing industry. This company has a loan in the First National Bank of Cincinnati. Moreover, it creates special holiday merchandise for the Christmas season which is funded primarily from the bank’s loan. According to bank’s criteria, each company which is considered to be major loan customer has to provide balance sheets and income statements. This has to be done to compare ratios with the industry average. Furthermore, the last analysis has shown that the Avery Product ratios have shown downward trend in the last decade. The current ratio was below 2.0 what means that the bank could force Avery Products into bankruptcy. To deal with this problem it has decided that the Avery Products should create a program which will improve its financial situation otherwise it will insist on immediate repayment of the loan. Therefore, Avery Products has decided to increase the loan from $300 000,– into $400 000,–. The question is if the bang will allow this type of the loan what will be calculated in this case.
1. Ratios for year 1975 and 1976
Quick ratio = (current assets — inventory) / current liabilities
1975
(816 000 — 510 000) / 314 000 = 0.97
1976
(1 234 600 — 826 200) / 669 500 = 0.61
Current ratio = current assets / current liabilities
1975
816 000 / 314 000 = 2.60
1976
1 234 600 / 669 500 = 1.84
Inventory turnover = sales / inventories
1975
2 754 000 / 510 000 = 5.4
1976
2 856 000 / 826 200 = 3.46 = 3.5
Average collection period (days) = accounts receivable / average daily credit sales
1975
277 400 / 7 650 = 36.3
1976
388 000 / 793.3 = 48.9
Fixed assets turnover = sales / fixed assets
1975
2 754 000 / 257 100 = 10.7
1976
2 856 000 / 230 500 = 12.4
Total assets turnover = sales / total assets
1975
2 754 000 / 1 073 100 = 2.57
1976
2 856 000 / 1 465 100 = 1.95
Return on total assets (%) = net income / total assets
1975
90 155 / 1 073 100 = 0.084
1976
53 040 / 1 465 100 = 0.036
Debt (%) = total debt / total assets
1975
314 000 + 40 800 / 1 073 100 = 0.33
1976
669 500 + 36 700 / 1 465 100 = 0.48
Profit margin on sales = net income / sales
1975
90 155 / 2 754 000 = 0.032
1976
53 040 / 2 856 000 = 0.018
Return on Equity = Return on Asset / (1 — Debt/Assets)
1975
8.4 / 1 – 314 000 / 1 073 100 = 0.12
1976
3.62 / 1 – 669 500 / 1 465 100 = 0.7
Year/Period
1976*
Quick ratio
Current ratio
Inventory turnover
Average collection period
Fixed-asset turnover
10.7X
12.4X
13.0X
Total asset turnover
2.57X
1.95X
2.6X
Return on total assets
8.4 %
3.6 %
11.7 %
Return equity
23.4 %
Debt ratio
50 %
Profit margin on sales
3.2 %
1.8 %
4.5 %
2. Strengths and weaknesses revealed by ratio analysis
The strengths and weaknesses of Avery Products ratios are going to be analyzed in the following paragraph. The first ratio is the quick ratio, which is showing downward trend from 1975 where it was 0.97 and 1976 where it was 0.61. Both ratios are under the industry average. Moreover, fixed asset turnover and total asset turnover also show lower point when comparing to industry average. These liquidity ratios illustrate