•
Liquidity Ratios :
YEAR
1993
1994
1995
1996
Current
Ratios
Quick
Ratios
3.8
3.7
3.4
3.6
Industry
Average
2.6
2.4
2.4
1.8
2.0
1.7
•
Leverage Ratios:
YEAR
1993
1994
1995
1996
Debt (%)
Time
Interest
Earned
41.4
37.7
35.3
31.6
8.0
8.5
11.6
15.7
•
Industry
Average
56.4
4.2
Activity Ratios
YEARS
1993
1994
1995
1996
Inventory
Turnover
Fixed Assets
Turnover
Total Assets
Turnover
Average
collection
period
Days
Purchase
Outstanding
6.4
6.4
4.8
5.1
Industry
Average
5.9
30.0
29.3
30.1
29
25.67
2.8
2.8
2.7
2.7
2.77
55
55
51
62.0
53
25
32
31
31.0
25
•
Profitability Ratios
YEARS
1993
1994
1995
1996
Gross margin
(%)
Net profit
margin (%)
Return to
Equity (%)
Return to
total assets
(%)
Operating
Margin (%)
24
23.5
24.5
25
Industry
Average
26
3
2.6
2.6
2.7
2.83
14.3
11.6
10.8
10.7
18.2
8.4
7.2
7
7.3
7.96
6.8
6
6.1
5.9
6.76
2. Part of Hamilton’s evaluation will consist of comparing the firm’s ratios to
the industry numbers shown in Exhibit 3.
A. Discuss the limitations of such comparative financial analysis.
1. The comparative analysis will be effective if both the industry follow the
same accounting principles, methods and accounting concepts.
2. It is very difficult to ascertain the correct trend if there is a structural
changes in an industry which are frequently happened.
3. Industry average is not particularly useful for analyzing firms, its
difficult to select appropriate benchmark industry.
4. Firms may have different fiscal year ends making comparison difficult if
the industry is cyclical.
5. The financial statements are from historical data. Therefore
comparative analysis of the financial statements of different years
cannot be done as inflation distorts affecting the industries.
6. The ratios being compared should be calculated using financial
statements that published in the same date and same year. Otherwise
it will provide wrong outputs.
B. In view of these limitations, why are such industry comparisons so
frequently made?
The use of ratio analysis for industry comparison gives an idea about the efficiency of
the firm and how the firm is doing compared to competitors. Simply they can be
considered reference to be compared to.
3. Hamilton thinks that the profitability of the firm to the owners has been hurt
White’s reluctance to use much interest-bearing debt. Is this a reasonable
position? Explain.
White reluctance to use much interest-bearing debt has no effect in the firm’s
profitability. The interest bearing debt of the firm measures the ability to make
contractual interest payment or to fulfill its interest obligations and has no effect or
relation to the firm’s profitability.
4. The case mentions that White rarely takes trade discounts, which are
typically 1/10, net 30. Does this seem like a wise financial move? Explain
The decision is considered as a wise financial move. Because of rarely taking the
discount, it will hold the firms cash which can be used in other purposes and the
discount is not that generous and 99% must be paid.
5. Calculate the company’s market -to - book (MV/BV) ratio. ( There are 5,000
shares of common stock)
Calculated Manually
6. Hamilton’s position is that White has not competently managed the firm.
Defend this position using your previous answers and other information in
the case.
1. Hamilton thinks that the profitability of the firms to the owners has been
hurt by White’s reluctance to use much interest bearing debt.
2. Hamilton suspects that HF’s inventory is “ excessive” and “ capital
unnecessarily tied again inventory”
3. Hamilton thinks that White has been generous in granting payment
extensions to customers.
4. Hamilton wonders about the wisdom of passing up the trade discount.
He frequently offered terms of 1/10, net 30.
7. White’s position is that he has effectively managed the firm. Defend this
position using your previous answers and other information in the case.
1. White’s position in a large inventory is necessary to provide speedy
delivery to the customers. He argues that the customer expect quick
service.
2. White has been generous in granting the extension of payments of
customers because he doesn’t want to lose sales.
3. White rarely takes the cash discount, because he thinks that the 1%
discount is not generous on their part.
8. Play the role of an arbitrator. Is it possible based on an examination of the
firm’s ratios and other information in the case to assess White’s
managerial competence? Defend your Position
Yes, because White’s actions and decisions will reflect in the financial statements first
and then to the firm’s ratio and all other information for being part of the firm, managing
the major operations and participating in financial decisions. White’s actions and
decisions make the ratio analysis with different year’s lots of ups and downs such as
granting the extension for payment by the customers and rarely taking the cash
discounts.
9. (a) Are the ratios you calculated based on market or book values? Explain.
All the computed ratios are based on the Book value, which recorded at the books of
the firm.
(b) Would you prefer ratios based on market or book values? Explain.
The calculations either to book value or market value are depends on the firms with lots
of machinery or lots of financial instruments that tend to have large book values. In
contrast, fashion designers or trading firms may have little or no book value because
they are only as good as the people who work there. Book value is not very useful in the
latter case, but for companies with solid assets it’s often the No. 1 figure for investors.