Abington-Hill Toys, Inc

Part IFinancial Ratio Analysis

I.

INTRODUCTION After the last of the original founder Lewis Hills death, Abington-Hill Toys, Inc

needs a new capable manager to take the president position. During the final years of Hills control, the firms financial condition had deteriorated. However, neither Abington nor Hill had one of folks was interested in the position. Therefore, the firms owners decided to seek a manager from outside of firm, who could save the company and reshape the company into the prosperous concern it once had been. After extensive correspondence and several personal interviews with each of the six applicants, Vernon Albright was chosen to head the firm. One of the Albrights first actions was to hire David Hartly as a company comptroller. Hartlys first task was to undertake a complete analysis of the firms financial condition.

II. METHODOLOGY A. Current Ratio = Current Assets / Current Liabilities.

B. C.

Quick Ratio = ( Current Assets Inventory) / Current Liabilities Average Collection Period = Accounts Receivable/ Annual Credit Sales x 360 days

D.

Inventory Turnover = Cost of Goods Sold / Inventory

E. Fixed Asset Turnover = Sales / Fixed Assets F.

G. H.

Asset Turnover = Sales / Total Assets Debt Ratio = Total Debts/ Total Assets Times Interest Earned = Operating Profit/ Interest Expense Gross Margin = Gross Profit / Sales Net Profit Margin = Net Income / Sales

I. J.

K. Operating Margin = Operating Income / Sales L. Return On Total Assets= EBIT/ Total Assets

M. Return On Net Worth= Net Income/ Shareholders Equity N. Z-score= 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1X5 X1= Working Capital/ Total Assets X2= Retained Earnings/ Total Assets X3= EBIT/ Total Assets X4= Market Value of Common Equity/ Total Liabilities X5= Sales/ Total Assets

III. SOLUTIONS A. Current Ratio:

a)

1990 = 300,000 / 110,000 = 2.727X

b) 1991 = 280,000 / 290,000 = .966 B. Quick Ratio:

a)

1990 = ( 300,000 -150,000) / 110,000 = 1.364X

b) 1991 = ( 280,000 -150,000) / 290,000 = .448 C. Average Collection Period:

a)

1991 = 120,000/ ( 1,200,000*.6/ 360) = 60.000 days

D. Inventory Turnover:
a)

1991 = 900,000/ 150,000 = 6.000X

E. Fixed Asset Turnover:

a)

1991 = 1,200,000/ 920,000 = 1.304X

F.

Asset Turnover:
a)

1991 = 1,200,000/ 1,200,000 = 1.000X

G. Debt Ratio:
a) 1990 = (110,000 +200,000) / 1,000,000 = .310 = 31% b) 1991 = (290,000 +200,000) / 1,200,000 = .408 = 40.8% H.

Times Interest Earned:

a)

1991 = 126,000/ 39,600 = 3.182X

I.

Gross Margin:
a)

1991 = 300,000/ 1,200,000 = .25 = 25%

J.

Net Profit Margin:

a)

1991 = 60,480/ 1,200,000 = .0504 = 5.04%

K. Operating Margin:
a) L.

1991 = 126,000/ 1,200,000 = .105 = 10.5%

Return On Total Assets:

a)

1991 = 126,000/ 1,200,000 = .105 = 10.5%

M. Return On Net Worth: a)

1991 = 60,480/ (200,000 + 510,000) = .085 = 8.5%

N. Z-score:
a)

1991 = 1.2 ((280,000- 290,000)/ 1,200,000) + 1.4 ( (60,480- 200,000)/ 1,200,000) + 3.3 (126,000/ 1,200,000) + 0.6 (200,000/

(290,000+200,000)) + 1 (1,200,000/ 1,200,000) = -.01+ (-.163) + .3465 + . 245 + 1 = 1.4185

IV. CONCLUSION
A.

Current ratio measures a company's ability to meet short-term debt and obligations. The higher the ratio, the more liquid the company is. Compared with the standard current ratio, 3.50X, the companys actual current ratio is much lower; even the 1991 year ratio is lower than 1, which means the company could not be able to pay its debt and obligations. Therefore, the company is under a critical situation, and the more investment will be more risk.

B.

Quick ratio measures a companys ability to meet its short-term obligations with its most liquid assets. A higher quick ratio implies less risk of the firm experiencing a cash shortfall in the near future. Compared with the standard ratio, 1.50X, the firms actual quick ratio was lower. The quick ratio in 1991 year was .448, which means the companys ability to payback its short-term obligations was very weak.

C.

Average collection period is an expression of a firms accounts receivable in terms of the number of days worth of sales that the accounts receivable

represents. It is how efficiently managers are managing their net working capital. The standard average collection period is 60.0 days, and the firms actual period is 60.0 days as well. Therefore, this item is on track.
D.

Inventory turnover measures how efficiently companies turn their inventory into sales. A high level (more dollars of sales per dollar of inventory) is generally better. The standard inventory turnover is 5.00X, and the actual inventory turnover is 6.000X. Therefore the Abington-Hill Toy, Inc was able to efficiently turn inventory into sales, and the condition is better than standards.

E.

Fixed asset turnover indicates how well the business is using its fixed assets to generate sales. Generally, the higher ratio, the better. The standard fixed asset turnover ratio is 1.43X, and actual ratio is 1.304X. The actual ratio is lower than the standards, which indicates that the business is over-invested in plant, equipment, or other fixed assets.

F.

Asset turnover measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. Companies with low profit margins tend to have high asset turnover. The standard asset turnover ratio is 1.00X, and the actual ratio is 1.00X as well. Therefore, the total asset turnover ratio is on track.

G.

Debt ratio indicates the percentage of a company's assets that are provided via debt. The higher the ratio, the greater risk will be associated with the firm's operation. The standard debt ratio is 45.0%, and both two years actual ratio is lower than standards. Therefore, the firms operation is in a good condition.

H.

Time interest earned indicates how well a company can cover its interest payment on a pretax basis. The standard time interest earned ratio is 4.10X, and actual ratio is 3.182X, which is lower than standards. Thus, the company has no enough earnings for interest payments.

I.

Gross margin indicates the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and

service sold by a company. The higher percentage, the more retains. The standard gross margin is 25.0%, and the actual gross margin is 25% as well. Thus, the company runs well in gross margin.
J.

Net profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies. The standard net profit margin is 8.0%, and the actual net profit margin is 5.04%, which is lower than standards. Therefore, the company gets only a really low margin.

K.

Operating margin measures a companys pricing strategy and operating efficiency. The ratio is 10.5%, which means operating margin is relatively low.

L.

Return on total assets indicates how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The standard return on total assets ratio is 8.0%, and actual ratio is 10.5%, which is higher than standards. A higher ratio means the business is earning more money and investing less on assets.

M. Return on net worth measures how much profit the business is generating with

the investments provided by the shareholders. It reflects whether the business is making the best use of those resources, or if there is a need to make changes that will help increase the percentage of return that is generated as a result of the shareholders equity. The standard return on net worth ratio is 14.55%, and actual ratio is 8.5%. Clearly, the company generates profit in a really low efficient.
N.

Z-score indicates that the probability that a firm will go into bankruptcy within two years. Compared to the Standard probability 1.875, the actual probability, 1.4185, is quite low. Therefore, the company is in a really bad finance condition, and possibly it will go into bankruptcy.

All in all, the Abington-Hill Toy, Inc is in a high risky condition right now.

Current ratio, quick ratio, fixed asset turnover, time interest earned, net profit margin, operating margin, return on net worth, and Z-score indicate that the company is not in a good condition, even facing bankruptcy. All these items need immediate attention. The managers need to figure out exactly way to all problems above, and then the firm can go back to the prosperous concern it once had been. Due to financial facts, the firm is in a weak condition, and it would not get fund back if anyone invests company now. Thus, I would not recommend investing in this company now.