Assessing Martin Manufacturing’s Current Financial Position

871 Words Apr 5th, 2013 4 Pages
Case: Assessing Martin Manufacturing’s Current Financial Position
Martin Manufacturing Company
Historical and Industry Average Ratios Ratio | Actual 2004 | Actual 2005 | Actual 2006 | Industry Average 2006 | Current Ratio | 1.7 | 1.8 | 2.5 | 1.5 | Quick Ratio | 1.0 | 0.9 | 1.4 | 1.2 | Inventory Turnover (times) | 5.2 | 5.0 | 5.3 | 10.2 | Average Collection Period | 50.7 days | 50.8 days | 58.0 days | 46 days | Total Asset Turnover (times) | 1.5 | 1.5 | 1.6 | 2.0 | Debt Ratio | 45.8% | 54.3% | 57% | 24.5% | Time Interest Earned Ratio | 2.2 | 1.9 | 1.6 | 2.5 | Gross Profit Margin | 27.5% | 28% | 27% | 26% | Net Profit Margin | 1.1% | 1.0% | 0.7% | 1.2% | Return on Total Assets
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The increasing trend of financial leverage and current asset can be blamed for this deterioration.

Cross sectional analysis:
The firm’s gross profit margin is higher than industry average. But its ROA, ROE and net profit margin are significantly lower than that of typical firm in the industry. This lower return might be due to higher financial leverage and excessive current assets used by the firm than that of used by the typical firm in the industry.

Market Ratio

Time series analysis:
Both price/earnings (P/E) and market/book (M/B) ratios are getting worse over the years. This indicates that company is losing investors’ confidence upon it.

Cross sectional analysis:
The comparison of the P/E ratio and M/B ratio of the firm with the typical firm in the industry indicates that investors have lower confidence on the firm than on the average firm in the industry. Investors have lower confidence on Martin Company, as they perceive that Martin’s ability to earn future profit will face more and increasing uncertainty. C. Summarize the firm’s overall financial position on the basis of your findings in part B.

Martin manufacturing has high liquidity ratio which is due to its excessive investment in current assets. High investment in current assets is represented by its low inventory turnover, low total asset turnover and high average collection period. Assets, 57% of which financed by liabilities, fails to

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