A.
COA Company
Ratio Analysis
Industry Average
2012
Current ratio
Quick ratio
Inventory turnover
Average collection period
Total asset turnover
Debt ratio
Times interest earned
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets
Return on common equity
Earnings per share
2.35
0.87
4.55
35.8 days
1.09
0.30
12.3
0.202
0.135
0.091
0.099
0.167
$3.10
Actual
2012
1.84
0.75
5.61
20.74 days
1.47
0.55
8.0
0.233
0.133
0.072
0.105
0.234
$2.15
Solutions:
Liquidity
 Current Ratio = Current Assets / Current Liabilities
$138,300 / 75,000 = 1.84
Quick Ratio = Cash + Marketable Securities+ Receivables / Current Liabilities
$15,000 + 72,000 + 34,100 /75,000 = 0.75
Activity
 Inventory Turnover = COGS / Average Inventory
$460,000/ 82,000 = 5.61
 Average Collection Period = 365/ Accounts Receivable Turnover
365/ 17.60 = 20.74
 Total Asset Turnover = Net Sales/ Total Asset

$600,000/ 408,300 = 1.47
Leverage
 Debt Ratio = Total Debt / Total Asset

$225,000 / 408,300 = 0.55
Times Interest Earned = Income Before Interest & Taxes / Interest Expense
$80,000 / 10,000 = 8.00
Profitability
 Gross Profit Margin = Gross Profit / Net Sales



$140,000/ 600,000 = 0.233
Operating Profit Margin = Operating Income / Net Sales
$80,000/ 600,000 = 0.133
Net Profit Margin = Net Income / Net Sales
$42,900/ 183,300 = 0.072
ROA = Net Income / Average Total Assets
$42,900/ 408,300 = 0.105
ROE = Net Income / Shareholder’s Equity
$42,900 / 183,300 + 0.234
Market Value
 EPS = $2.15

Liquidity: The firm is slightly less liquid than the rest of the industry, as its current
ratio and quick ratio are both below industry average.
Activity: All activity ratios indicate a faster turnover of assets compared to the
industry. Further analysis is necessary to determine whether the firm is in a weaker
or stronger position than the industry. Its inventory turnover is also significantly
below average. The firm average collection period is much better the industry,
indicating that it collects on its receivables much better than the rest of the
industry.
Debt: The firm uses more debt than the average firm, resulting in higher interest
obligations that could reduce its ability to meet other financial obligations.
Profitability: The firm has a higher gross profit margin than the industry,
indicating either a higher sales price or a lower cost of goods sold. The
operating profit margin is in line with the industry, but the net profit margin is
lower than industry, an indication that expenses other than cost of goods sold
are higher than the industry. Most likely, the damaging factor is high interest
expenses due to a greater than average amount of debt. The increased leverage,
however, magnifies the return the owners receive, as evidenced by the superior
ROE.
Market Value: The firm is .95 lower of its earnings per share than the industry.
B.
The firm needs improvement in its liquidity ratios and possibly a reduction in its
total liabilities. The firm should investigate the possibility of slow-moving or
obsolete inventory and for the average collection period, no
recommendations here except to continue what they are doing.
The firm is more highly leveraged than the average firm in its industry and
therefore has more financial risk. Pay down the long-term debt, which will
save the firm on interest expense, and also put in a better lending position.
The profitability of the firm is lower than average but
is enhanced by the use of debt in the capital structure, resulting in a superior
ROE. To raise its EPS, it would need to either increase profits or decrease the
number of shares of outstanding by doing a share profit.