Ratio Analysis Answer

GENNER A.
RAZ
BA 309
a. Assess Corrigan’s liquidity position, and determine how it compares with peers and how the liquidity position has
changed over time.
Answer: Corrigan's liquidity position has improved from 2015 to 2016; however, its current ratio is still below the
industry average of 2.7.
b. Assess Corrigan’s asset management position, and determine how it compares with peers and how its asset
management efficiency has changed over time.
Answer: Corrigan's inventory turnover, fixed assets turnover, and total assets turnover have improved from 2015 to
2016; however, they are still below industry averages. The firm's days sales outstanding has increased from 2015
to 2016—which is bad. In 2015, its DSO was close to the industry average. In 2016, its DSO is somewhat higher.
If the firm's credit policy has not changed, it needs to look at its receivables and determine whether it has any
uncollectible. If it does have uncollectible receivables, this will make its current ratio look worse than what was
calculated.
c. Assess Corrigan’s debt management position, and determine how it compares with peers and how its debt
management has changed over time.
Answer: Corrigan's debt ratio has increased from 2015 to 2016, which is bad. In 2015, its debt ratio was right at the
industry average, but in 2016 it is higher than the industry average. Given its weak current and asset management
ratios, the firm should strengthen its balance sheet by paying down liabilities.
d. Assess Corrigan’s profitability ratios, and determine how they compare with peers and how its profitability position
has changed over time.
Answer: Corrigan's profitability ratios have declined substantially from 2015 to 2016, and they are substantially
below the industry averages. Corrigan needs to reduce its costs, increase sales, or both.
e. Assess Corrigan’s market value ratios, and determine how its valuation compares with peers and how it has
changed over time.
Answer: Corrigan's P/E ratio has increased from 2015 to 2016, but only because its net income has declined
significantly from the prior year. Its P/CF ratio has declined from the prior year and is well below the industry
average. These ratios reflect the same information as Corrigan's profitability ratios. Corrigan needs to reduce costs
to increase profit, lower its debt ratio, increase sales, and improve its asset management.
f. Calculate Corrigan’s ROE as well as the industry average ROE, using the DuPont equation. From this analysis,
how does Corrigan’s financial position compare with the industry average numbers?
Answer:
ROE = PM x TA Turnover x Equity Multiplier

2016 2.22% 0.43% 2.31 2.21
2015 11.47% 2.64% 2.15 1.99
Industry Ave. 18.20% 3.5% 2.60 2.00
When using the extended Du Pont equation, Corrigan's profit margin is clearly below the industry average
and sharply decreased between 2015 and 2016. Although it marginally increased between 2004 and 2005, the
company's total assets turnover is still below the industry standard. From 2015 to 2016, the company's equity
multiplier rose and is now higher above the industry average. This shows that the company's debt ratio is rising and
is now greater than the average for the sector. The debt ratio should be reduced, expenditures should be cut, and
asset management should be improved by either employing fewer assets for a certain level of revenues or
increasing sales.
g. What do you think would happen to its ratios if the company-initiated cost-cutting measures that allowed it to hold
lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think
about which ratios would be affected by changes in these two accounts.
Answer: If Corrigan initiated cost-cutting measures, this would increase its net income. This would improve its
profitability ratios and market value ratios. If Corrigan also reduced its levels of inventory, this would improve its
current ratio—as this would reduce liabilities as well. This would also improve its inventory turnover and total
assets turnover ratio. Reducing costs and lowering inventory would also improve its debt ratio.

Ratio Analysis Answer

Uploaded by

Copyright:

Available Formats

Ratio Analysis Answer

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ratio Analysis Answer

Uploaded by

Copyright:

Available Formats

GENNER A.

ROE = PM x TA Turnover x Equity Multiplier

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.