Ratio Analysis: The Corrigan Corporation\'s 2013 and 2014 financial statements f

ID: 2382775 • Letter: R

Question

Ratio Analysis: The Corrigan Corporation's 2013 and 2014 financial statements follow, along with some industry average ratios.

a. Assess Corrigan's liquidity position and determine how it compares with peers and how the liquidity position has changed over time.

b. Assess Corrigan's asset management position and determine how it compares with peers and how its asset management efficiency has changed over time.

c. Assess Corrigan's debt management position and determine how it compares with peers and how its debt management has changed over time.

d. Assess Corrigan's profitability ratios and determine how they compares with peers and how its profitability position has changed over time.

e. Assess Corrigan's market value ratios and determine how its valuation compares with peers and how it has changed over time.

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?

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 the changes in these two accounts.

Corrigan Corporation: Balance Sheets as of December 31

Corrigan Corporation: Income Statements for Years Ending December 31

Per Share Data

Industry Financial Ratios

^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.

2014 2013 Cash 72000 65000 Accounts receivable 439000 328000 Inventories 894000 813000 Total current assets 1405000 1206000 Land and building 238000 271000 Machinery 132000 133000 Other fixed assets 61000 57000 Total assets 1836000 1667000 Accounts payable 80000 72708 Accrued liabilities 45010 40880 Notes payable 476990 457912 Total current liabilities 602000 571500 Long-term debt 404290 258898 Common stock 575000 575000 Retained earnings 254710 216602 Total liabilities and equity 1836000 1667000

Explanation / Answer

Solution-a

The liquidity position of Corrigan’s has improved from 2013 to 2014. But, the current ratio of Corrigan is still low than the industry average of 2.7.

Solution-b

Corrigan total assets turnover, inventory turnover and fixed assets turnover have improve from 2013 to 2014. But, they all are below the industry average. There is increase in firm day’s sales outstanding ratio from 2013 to 2014 which is bad situation. In 2013 the days sales outstanding ratio is near of industry average and in year 2014 days sales outstanding ratio is higher than industry average. If the credit policy of the firm not change than the firm have to look there receivables and determine it has any uncollectible. If the receivables not collectable than current ratio look worse.

Solution-c

The debt ratio of the Corrigan has increased from 2013 to 2014 which is bad situation. The weak asset management and current ratio, the firms improve or make strengthen their balance sheet by paying all the down liability.

Solution-d

The profitability ratio of the Corrigan have decline from 2013 to 2014, and they are below the industry average. Corrigan has to take action need to increase sales, reduce the cost or both.

Solution-e

The P/E ratio of the Corrigan has increased from 2013 to 2014 because of the net income is declining from the prior years. The P/E ratio also shows the same information as profitability ratio. Corrigan needs to increase profit, reduce cost, increase the sales, lower the debt ratio and also improves the Corrigan assets management.

Solution-f

ROE =

PM x

TA Turnover

x Equity Multiplier

2014

2.22%

0.43%

2.31

2.21

2013

11.47%

2.64%

2.18

1.99

Industry Avg.

18.20%

3.50%

2.60

2.00

After looking at Du point equation the Corrigan profit margin is lower than the industry average and it’s declined from 2013 to 2014. But the Corrigan total assets turnover ratio improves from 2013 to 2014. But total assets turnover ratio still below the industry average. The Corrigan equity multiplier has increase from 2013 to 2014 and also equity multiplier is higher or more than the industry average which shows the Corrigan debt ratio is also increasing.

Solution-g

The net income will be increased of Corrigan if the initiated cost cutting measures. This also improves the Corrigan market value and profitability ratio. If the firm also reduces their level of inventory this will also improve the Corrigan current ratio and liability is also reduced.