Essentials of Financial Management 3rd Edition- Page 134
4-24 Ratio Analysis
The Corrigan Corporation’s 2011 and 2012 financial statements follow, along with some industry
average ratios.
Industry Financial Ratios (2012)
Current ratio 2.7 x
Inventory turnover 7.0x
Days sales outstanding 32.0 days
Fixed assets turnover 13.0x
Total assets turnover 2.6x
Return on assets 9.1%
Return on equity 18.2%
Profit margin 3.5%
Debt-to-assets ratio 50.0%
P/E ratio 6.0x
a. Industry average ratios have been constant for the past 4 years.
b. Based on year-end balance sheet figures.
c. Calculation is based on a 365-day year.
A) Assess Corrigan’s liquidity position and determine how it compares with peers and how
the liquidity position has changed over time.
The current ratio measures the liquidity of a company and is calculated by dividing its current
assets by its current liabilities.
Current Assets
Current ratio =
Current Liabilities
$ 1,206,000 $ 1,405,000
2011 = = 2.11 2012 = = 2.33
$ 571,500 $ 602,000
The liquidity position is compared to the industry, the liquidity position is lower because the
industry average is 2.7: 1. Corrigan Corporations liquidity position has improved compared to
the previous years.
B) Assess Corrigan’s asset management position and determine how it compares with peers
and how its asset management efficiency has changed over time.
Asset management position can be determined with Fixed asset turnover ratio, it looks how
efficiently the company uses its fixed assets, to generate sales.
Sales
Fixed Asset Turnover = Assets ¿
Net ¿
$ 3,635,000 $ 4,240,000
2011 = = 7.89 2012 = = 9.84
$ (271,000+133,000+57,000) $ (238,000+132,000+61,000)
The asset management position compared to the industry it is lower because the industry
average is 13.0x. Corrigan Corporations asset management position has improved compared to
the previous years.
C) Assess Corrigan’s debt management position and determine how it compares with peers
and how its debt management has changed over time.
To analyze debt management position requires calculation in debt to asset ratio.
(Long Term Debt +Current Liabilities)
Debt Ratio =
Total Assets
$ (258,898+571,500) $ (404,290+602,000)
2011 = = 0.498 @ 2012 = = 0.548 @
$ 1,667,000 $ 1,836,000
49.8% 54.8%
The debt management position compared to the industry is higher in 2012 but in 2011 it as
lower because the industry average is 50.0%. Corrigan Corporations debt management position
has worsened compared to the previous years.
D) Assess Corrigan’s profitability ratios and determine how they compare with peers and
how its profitability position has changed over time.
The profitability ratios can be used to measure the ability of a business to create earnings in
this case we will be using Profit margin:
Net Income
Profit Margin =
Sales
$ 95,970 $ 18,408
2011 = = 0.026 @ 2.64% 2012 = = 4.341 @ 0.43%
$ 3,635,000 $ 4,240,000
The profit margin compared to the industry is lower because the industry average is 3.5%.
Corrigan Corporations profit margin or profitability has worsened compared to the previous
years.
Next, return on assets will state what has return which business is generating giving the level of
assets the business owns.
Net Income
Return on Assets =
Total Assets
$ 95,970 $ 18,408
2011 = = 0.0575 @ 5.75% 2012 = = 0.010 @ 1.0%
$ 1,667,000 $ 1,836,000
The return on assets ratio compared to the industry is lower because the industry average is
9.1%. Corrigan Corporations return on asset has decreased over the year.
Lastly, the return on equity which measure the level of return which business is producing for
each dollar which an investor has put into it.
Net Income
Return on Equity = Return on Equity =
Shareholder ' s Equity
Net Income
(Common stock +retained earnings)
$ 95,970 $ 18,408
2011 = = 0.115 @ 2012 = = 0.0222 @
$ (575,000+261,602) $ (575,000+254,710)
11.5% 2.22%
The return on equity ratio compared to the industry is lower because the industry average is
18.2%. Corrigan Corporations return on equity has decreased over the year. Overall, the
profitability of Corrigan Corporations has decreased over time.
