International Finance Ch3
Assessing Martin Manufacturing’s Current Financial Position
Terri Spiro, an experienced budget analyst at Martin Manufacturing Company, has been charged with assessing the firm’s financial performance during 2012 and its financial position at year-end 2012. To complete this assignment, she gathered the firm’s 2012 financial statements (see below). In addition, Terri obtained the firm’s ratio values for 2010 and 2011, along with the 2012 industry average ratios (also applicable to 2010 and 2011). These are presented in the table on historical and industry average ratios below.
To Do: a. Calculate the firm’s 2012 financial ratios, and then fill in the preceding table. (Assume a 365-day year.) b. Analyze the …show more content…
Compared to 2010 and 2011, this ratio has been growing and it indicates that the company’s operations are going to a higher risk level.
Times interest earned ratio: 3 times bigger than the average. A high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects (decrease in liabilities shown in the table). In 2010 and 2011 this ratio was close to the average. Consequently, firm needs to invest its money into operations which would ensure the growth of the company.
Gross profit margin: Almost the same as the average which reveals that the source for paying additional expenses and future savings is satisfactory. Comparing with the year 2010 and 2011 it was pretty much the same, so we can draw a conclusion that the situation in the company at the moment is stable.
Net profit margin: 2 times lower than the average and comparing with the previous period decreased noticeably and a low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.
(P/E) ratio, (M/B) ratio- not included
In conclusion, taking into consideration ROA and ROE ratios, the company is not at a higher efficiency level because management is not using its assets and investment funds to generate earnings growth at its full capacity (compared to