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Liquidity ratios
Current ratio 3.07 2.68 1.75 2.5
Quick ratio 1.66 1.08 0.73 1.0
Leverage ratios
Debt ratio (%) 40.46 46.33 59.80 50.00
Times interest earned 15.89 7.97 1.48 7.70
Asset management ratios
Inventory turnover(cost) 7.14 4.55 3.57 5.70
Inventory turnover (selling) 9.03 5.59 4.19 7.00
Fixed assets turnover 11.58 11.95 12.09 12.00
Total assets turnover 3.06 2.60 2.03 3.00
Average collection period 36.00 35.99 53.99 32.00
Profitability ratios
Profit margin (%) 5.5 3.44 0.39 2.90
Gross profit margin (%) 20.89 18.70 14.86 18.00
Return on total assets 16.83 8.95 0.78 8.80
Return on owners' equity 28.26 16.68 1.96 17.50
Potential failure indicator
Altman Z factor 3.0893 2.622 2.043 1.81/2.99
Current ratio and quick ratio has decreased in 2005 as compared to 2003, 2004 and industry
average.
Debt ratio represent the company is using more debt in comparison of equity.
Inventory turnover (cost) and (selling ) indicates SRM Company is poor in sales.
Fixed assets turnover means company is effectively utilizing its fixed assets.
Total assets turnover represents the company is not effective to utilize its assets.
Average collection period is higher than industry average ,2003 and 2004.
Gross profit margin seems to be declined which represents it is not able to make good profit.
Return on total shows company is not able to generate profit using its assets.
Return on owners equity is not able to generate profit from shareholders fund.
Altman Z factor has decreased in 2005 compared to 2003 2004 and industry average.
2. BASED ON THE CASE DATA AND THE RESULTS OF YOUR
ANALYSIS IN QUESTION 1, WHAT ARE THE SRM'S STRENGTHS
AND WEAKNESSES? WHAT ARE THE CAUSES THEREOF? (USE OF
THE DU PONT SYSTEM AND ALTMAN Z FACTOR WOULD
FACILITATE ANALYSIS AND STRENGTHEN YOUR ANSWER.)
Strengths of SRM
Liquidity ratios like current ratio and quick ratio are in decreasing pattern.
This shows the company is not in the sound liquid position.
Accept of fixed assets turnover , all the assets management ratios are in
decreasing manner. This means SRM is not mobilizing its assets in the
effective manner.
Debt equity ratio in 2005 is 59.80 which is much higher than that of
industry average that is 50. The higher the debt ratio the company will be in
more riskier position.
WORKINGS NOTES FOR ALTMAN Z FACTOR
For 2003
X1= Working capital / Total assets
=30565 / 61539 = 0.497
X2 = Retained earnings / Total assets
=11041/ 61539 = 0.179
X3 = EBIT / Total assets
= 21251 / 61539 = 0.345
X4 = Market value of equity / Book value of total debt
= 68481.58 / 24901 = 2.750
X5 = Sales / Total assets
= 188097 / 61539 = 3.057
ROE =
Liquidity ratios
Current ratio 1.75 1.69 1.83 2.50
Quick Ratio 0.73 1.09 1.23 1.00
Leverage ratios 59.80 58.83 54.98 50.00
Debt ratio 1.48 2.69 4.68 7.70
Times interest earned 3.57 5.70 5.70 5.70
Assets management ratios 4.19 7.00 7.00 7.00
Inventory turnover (cost) 12.09 10.3 11.24 12.00
Inventory turnover (selling) 2.03 1.98 1.94 3.00
Fixed assets turnover 53.99 32 32 32.00
Total assets turnover 0.39 2.15 4.27 2.90
Average collection period 14.86 17.5 20 18.00
Profitability ratios 0.78 4.26 8.28 8.80
Profit margin 1.96 10.34 18.39 17.50
Gross profit margin
Return on total assets
Return on owners' equity
INTERPRETATION
LIQUIDITY RATIOS
2005
2.5
2006 projected
2
2007 projected
1.5
1 industry average
0.5 Column1
0
current ratio
QUICK RATIOS
1.4
1.2
0.8 2005
2006 projected
2007 projected
0.6
Industry average
0.4
0.2
0
Quick ratio
LIQUIDITY RATIOS
DEBT RATIO
62
60
58
56 2005
2006 projected
54
2007 projected
52 industry average
Column1
50
Column2
48
46
44
debt ratio
TIME INTEREST RATIO
5
4.5
4
3.5
3
2.5
2
1.5 2005
1 2006 projected
0.5 2007 projected
0
times interest ratio
ASSETS MANAGEMENT RATIOS
INVENTORY TURNOVER RATIO (COST)
3
2005
2006 projected
2
2007 projected
1
0
inventory turnover
ratio (cost)
INVENTORY TURNOVER RATIO(SALES)
4 2005
2006 projected
3 2007 projected
0
inventory turnover
ratio (sales)
TOTAL ASSETS TURNOVER RATIO
3.5
2.5
2 2005
2006 projected
2007 projected
1.5
industry average
Column1
1
0.5
0
Total Assets
Turnover
AVERAGE COLLECTION PERIOD
60
50
40
30 2005
2006 projected
2007 projected
20
10
0
Average collection
period
PROFITABILITY RATIOS
PROFIT MARGIN RATIO
4.5
3.5
3
2005
2.5 2006 projected
2007 projected
2
industry average
1.5 Column1
0.5
0
Profit margin
GROSS PROFIT MARGIN
25
20
15
2005
2006 projected
2007 projected
10 industry average
Column1
0
Gross profit
margin
RETURN ON TOTAL ASSETS
10
6
2005
5 2006 projected
2007 projected
4 industry average
Column1
3
0
Return on Total
Assets
RETURN ON OWNERS EQUITY
20
18
16
14
12 2005
10 2006 projected
2007 projected
8 industry average
6 Column1
0
Return on owner's
equity
5. IF ALL SHORT TERM BANK LOANS ARE REPAID TOWARDS THE
END OF THE FIRST HALF OF 2006, DO YOU THINK THAT COMPANY
IS STILL ABLE TO PAY REGULAR DIVIDEND AND MAINTAIN
MINIMUM CASH BALANCE. REVISE THE TABLES 9,10 AND 11 (OR
COMPLETE THE TABLES 12,13 AND 14). DO YOU FIND ANY
SITUATIONS DEVELOPING THAT MANY INDICATE POOR
FINANCIAL POLICY? WHAT WOULD BE THE IMPACT OF SUCH
SITUATIONS ON THE RATIOS FOR THE COMPANY, AND ARE SUCH
IMPACTS NECESSARILY EITHER GOOD OR BAD? WHY?
Table no 12 :Pro Forma Income Statements (Revised)
Worksheet for Year End 2007 (Thousands of Dollars)
Particulars 2005 2006 Revised 2007 Revised
Net Sales 215305 228223 249904
Liquidity ratios
Leverage ratios
Profitability ratios
Debt Ratio
It shows the degree of company relying on outside funds.
2005 0.5980
2006 0.46
2007 0.4657
Industrial Average 0.50
CONTD..
Current Ratio
It shows the how much of current assets, it has to pay the
current liabilities.
2005 1.75
2006 2.35
2007 2.54
Industrial Average 2.50
CONTD..
2005 0.73
2006 1.17
2007 1.42
Industrial Average 1
CONTD..
Profit Margin
It shows how much profit the firm is earning to know
pay the short term and long term loan.
2005 0.39
2006 2.64
2007 5.21
Industrial Average 2.90
THE CONDITIONS (COLLATERAL, GUARANTEE OR OTHER
SAFEGUARDS) THE BANK SHOULD IMPOSE TO PROTECT
ITSELF ON THE LOANS ARE LISTED BELOW: