Assessing Martin Manufacturings Current Financial Position1) Calculate the firms 2009 financial ratios, and then fill in the preceding table. (Assume a 365-day year)Martin Manufacturing CompanyHistorical and Industry Average RatiosRatioActual 2007Actual 2008Actual 2009Industry Average 2009

Current Ratio1.71.82.51.5

Quick Ratio1.00.91.41.2

Inventory Turnover (times)5.25.05.310.2

Average Collection Period50.7 days50.8 days58.046 days

Total Asset Turnover (times)1.51.51.62.0

Debt Ratio45.8%54.3%57%24.5%

Time Interest Earned Ratio2.21.91.62.5

Gross Profit Margin27.5%28%27%26%

Net Profit Margin1.1%1.0%0.7%1.2%

Return on Total Assets (ROA)1.7%1.5%1.1%2.4%

Return on Equity (ROE)3.1%3.3%2.6%3.2%

Price/Earnings (P/E) Ratio33.538.734.4843.4

Market/Book(M/B) Ratio1.01.10.881.2

a) Current Ratio

b) Quick Ratio

c) Inventory turnover (times)

Comment: 2007 and 2008 current ratio at 5.2 and 5.0 respectively were considered the worst compared to 2009. However, when compared to industry average, it is below the average. This shows the company is having a problem to sell their product or they are holding the inventory for too long.

d) Average collection period (days)

Comment: The average collection period has increase over the years however in 2009 there is a significantly increase to 58.0 days compared to industry average at 46.0 days. This shows that the company is taking longer time to collect its debts from debtors and poorly managed credit or collection department or both.

e) Total asset turnover (times)

f) Debt Ratio

Comment: The company is having the highest debt ratio in 2009 at 57% compared to 2007 at 45.8% and 2008 at 54.3% and also the highest when compared to industry average at 24.5%. This shows the company is taking high risk on its financial leverage and financial risk then other firms in the industry. It will leads to bankruptcy and having less cash to cover its expenditure.

g) Times interest earned

h) Gross profit margin

i) Net profit margin

j) Return on total assets

k) Return on equity

l) Price/Earnings (P/E) Ratio

m) Market/Book (M/B) Ratio

2) Analyse the firms current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firms liquidity, activity, debt, profitability, and market.a) Liquidity Ratioi) Time-series analysisThe firms ability to pay its current liabilities out of its current assets has increased, reducing its short term liquidity risk or the chance of being technically insolvent. Even though its quick ratio is lowest in 2008, there is a significant upward trend in quick ratio in 2009.

ii) Cross-sectional analysisThe firms liquidity ratios are significantly higher than the industry average, indicating it has excessive investment in current assets and thereby it is avoiding unnecessary liquidity risk and sacrificing chances of getting additional returnb) Activity Ratioi) Time-series analysisThe firms inventory turnover and total asset turnover are stable, but its average collection period has increased over the years. There is a symptom of collection problem due to increase of average collection period.

ii) Cross-sectional analysisInventory turnover is significantly lower than the industry average indicating the firm held too much of inventory relative to its sales. The average collection period is higher than the industry average which indicates that firm has collection problem or the firm provides too much flexible credits than typical firm in the industry and eventually the firm is sacrificing its return. Total asset turnover is significantly lower than industry average. Compared to the typical firm in the industry, the sales volume is not sufficient for volume of committed assets as indicated by its low total asset turnover.c) Debt Ratioi) Time-series analysisOver the years, the firm is getting more levered and thus placing itself at higher financial risk. On the other hand, its time interest earned ratio has decreased over the year which indicates that firm ability to service debt has decreased. The firm may face higher financial risk due to the firms decrease trend of time interest earned ratio and increase trend of debt ratio.

ii) Cross-sectional analysisThe debt ratio of the firm is much higher than that of average firms in the industry. This means that the financial leverage and financial risk taken by the firm is much higher than that of taken by the typical firm in the industry. Firms time interest earned ratio is lower than the industry average. So the financial risk taken by the firm is also fuelled by its low time interest earned ratio which eventually may lead the firm toward dangerous situation.d) Profitability Ratioi) Time-series analysisThe Gross Profit Margin is good but Net Profit Margin, Return on Asset (ROA) and Return on Equity (ROE) are deteriorating. The deterioration due to increase trend of financial leverage and current asset.

ii) Cross-sectional analysisThe firms gross profit margin is higher than industry average. But its ROA, ROE and net profit margin are significantly lower than average firms in the industry. Lower return maybe due to higher financial leverage and excessive current assets used by the firm than that of used by the typical firms in the industry.e) Market Ratioi) Time-series analysisBoth price/earnings (P/E) and market/book (M/B) ratios are getting worse over the years indicating investors are losing confidence in the firm.

ii) Cross-sectional analysisThe P/E ratio and M/B ratio of the firm compared to typical firms in the industry indicates that investors have lower confidence on the firm than on the average firm in the industry. The investors may perceives that there is uncertainty in the firms ability to earn future profit.

Recommendation1) The company needs to setup a fix credit term for its customers and facilitate those who requires more time to pay while maintaining the good relationship. The company may also refuse future business deals with adamant customers who refuse to pay the debt.2) The company require to improve its assets and cash management as debt ratio, average collection ratio and time-interest ratio indicates that there might exist issues with its cash management.