4-25 RATIO ANALYSIS The Corrigan Corporation\'s 2015 and 2016 financial statemen
ID: 2808982 • Letter: 4
Question
4-25 RATIO ANALYSIS The Corrigan Corporation's 2015 and 2016 financial statements follow, along with some industry average ratios a. Assess Corrigan's liquidity position, and determine how it compares with peers and b. Assess Corrigan's asset management position, and determine how it compares with c. Assess Corrigan's debt management position, and determine how it compares with d. Assess Corrigan's profitability ratios, and determine how they compare with peers and e. Assess Corrigan's market value ratios, and determine how its valuation compares with f. Calculate Corrigan's ROE as well as the industry average ROE, using the DuPont how the liquidity position has changed over time. peers and how its asset management efficiency has changed over time. peers and how its debt management has changed over time. how its profitability position has changed over time. peers and how it has changed over time. 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 changes in these two accounts Corrigan Corporation: Balance Sheets as of December 31 2016 2015 Cash Accounts receivable Inventories $ 72,000 65,000 439,000 894,000813,000 1,405,000 $1,206,000 271,000 Total current assets Land and building 238,000 132,000 Other fixed assets Total assets 1 836,000 $1667 000 Accounts payable Accrued liabilities 80,000 72,708 40,880 476990 457912 45,010 Notes payable Total current liabilities 02000 $571,500 Long-term debt Common stock Retained earnings Total labilities and equity 258,898 575,000 254.710 261,602 1836.000$1,667000Explanation / Answer
Answering the first 4 parts:
(a) Liquidity position can be analysed through Current Ratio.
Current Ratio: Current Assets/ Current Liabilities = 1,405,000/602,000=2.33 in FY16
In FY15 = 1,667,000/571,500 = 2.92 times
Comparing with industry average of 3x times Corrigan has lower current Ratio. we should also note that it's liquidity position has slightly worsened over the last year. However, on an absolute level it's still healthy. Any current ratio above 1x is adequate.
(b) Asset management position can be determined by Asset turnover ratio and Fixed assets turnover ratio.
Asset Turnover = Sales / Average Fixed Assets
Fixed Assets Turnover: Sales / Average fixed assets
Return on total assets: Net Income / Average fixed assets
Note: There is no income statement provided in the question. We need the sales number and Net income from the income statement to calculate these ratios
(c) Debt management position can be estimated by Debt to Capital which is given by
Debt / ( Debt + Equity)
Debt = Long Term debt + Short term debt/ Notes payable
= 404,290 + 476,990 = 881,280
Equity = Common stock + Retained Warnings
= 575,000 + 254,710 = 829,710
Total Capital = 1,710,990
Debt to Captial = 881,280 /1,710,990
= 51.5%
In 2015, Debt = 457,912+258,898 = 716,810
Equity = 575,000 + 261,602 = 836,602
Total Capital = 716,810 + 836,602 = 1,553,412
Debt to Capital = 716,810/1,553,412 = 46.1%
Hence, we xan conclude that the company has become more leveraged over time
We can also conclude that the company is more leveraged than it's industry peers as it has more debt in it's capital structure.
(d) Profitablity ratios are determined by Net Profit Margin and Return on Invested Capital. We need the income statement data such as net income , sales and operating income as well as the tax rate
You have not peovided the income statement. Please provide that and I will be happy to answer the remaining questions
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