Strong Tie Case Study
From: Robert Markwell, Financial Consultant
Subject: Analysis and recommendations for Strong Tie LTD.
To: David Johnstone, CEO, Strong Tie LTD.
Strong Tie’s liquidity ratios have decreased each year from 2006-2008. Typically, liquidity ratios measure how swiftly assets can be turned into cash in order to cover the company 's short-term obligations. The industry average in current ratio is 4, which Strong Tie fell below in 2008 with a 3.13. This drop could correlate with the decrease in cash and temporary investments over the same time frame. If this declining trend continues the company could find itself unable to pay all required obligations. One of the keys to stabilizing the ratio is to increase …show more content…
This means that Strong Tie is holding its inventory longer than expected and as the inventory ratio decreases the days to sell is increasing. Raw Materials inventory has been steadily increasing, going up nearly 7 points since 2006 and currently 10 points above the industry average. This is an alarming issue due to the fact that the WIP inventory and finished goods inventory are decreasing. With the company’s inventory turnover decreasing, it means that Strong Tie is holding its inventory longer than expected and as the inventory ratio decreases the days to sell is increasing. Another indication that the company needs to readjust some finances can be seen in the calculation for total asset turnover. The industry average is 1.7 and in 2008 Strong Tie was at 1.32, the higher the ratio, the healthier the company is performing, being that higher ratios imply that the company is generating more revenue per dollar of assets. This is important because it shows the value of generated revenue in relation to the value of its …show more content…
This is concerning for many reasons, particularly because the net sales of the company have been more consistent. Net sales were at 16,200 in 2006 with a gross profit margin ratio of 35.52, compared to 16,500 in 2008 with a gross profit margin ratio of 27.58. This comparison shows that the sales volume is fairly high, which means you might be able to increase your profit margin by raising prices on certain goods. The increased profit margin might outweigh the loss of sales due to increased prices. If you are opposed to raising prices, cutting costs in administration salaries and becoming more efficient in production will lower your COGS and overhead costs while increasing your overall profit margins. Some ways to lower costs could be to improve inventory control and cash collections. The return on assets of Strong Tie has dropped significantly from 2006-2008. The industry average is 17, in 2008 it was 25.39, and then in 2007 it plummeted to 8.01, and dropped all the way to 0.06 in