Question

Presented below are selected ratio for Sun Electronic Corporation for three periods 2009, 2010, 2011, and its industry average.

Industry 2009 2010 2011 Financial Ratios

2 2 2.13 3.7 Current Ratio

1.1 1.5 1.1 1.98 Acid-test Ratio

1.00 0.90 0.82 0.57 Cash ratio

4.1 5.25 4.82 2.8 Inventory turnover

6.00 6.3 5.8 6.50 Accounts Receivables Turnover

40% 43% 45% 40% Debt ratio

22% 20% 17% 15% Debt to Equity ratio

8% 8.50% 8.60% 8.70% Return on total assets

1.85 1.9 1.78 1.66 Sales to fixed assets

10.00% 7.80% 6.00% 5.30% Net profit margin

15% 14.40% 12.30% 10% Dividend pay out

2% 3.25% 2.10% 1.70% Dividend Yield

19 18.3 18.5 16.6 Price earnings ratio

Instructions:

According to the ratios computed above, answer and explain the following:

1. Construct a list of strengths and weaknesses for the firm after analyzing the ratios.

2. If you want to invest in this company, what would you be concerned about? Explain.

3. If you were a banker, what would you be concerned about if this company approached you for a long-term loan to continue its expansion program?

4. If you were a supplier to this company, what would you be concerned about? Explain

Answer 1

Answer 1:

LIst of strengths are:

a. As the current ration is increasing so we can say that the company's short terrm solvency position is much better and also more than industry's position.

b. As the debt to equity ratio is decreasing which signifies that the long term solvency position of the company is much better.

c.As the return to total asset ratio is increasing and more than the industry position which signifies that the company is earning a good return from their assets..Higher the ratio signifies better position..

d..The collection frequency of the company is very good as it has a favourable debtors turnover ratio..

Weakness :

a..As the inventory turnover ratio is decreasing and much lower than the industry position so w can say that the company is not in better position.and its stock position is not good.Ideal inventory turnoverr ratio is 4 to 6.

b..As the net profit ratio is decreasing which signifies that the company has more operating expenses than operating revenues...The profitability of the company from primary operations is not good.

c.The company is not getting sufficient return from its investment as the P/E ratio is mush lower than the industry position.

d.. The company gives back the shareholders a very less amount as the dividend payout ratio is much lower..

Answer 2.

If one has to invest in the company then he have to concerned about the

a. Price earning ratio - which signifies return position of the company

b. Net Profit margin: which signifies the profit position of the company.

c. Dividend payout ratio- More the dividend payout ratio attracts the investors much.

Answer 3.

The banker should watch the debt equity ratio...The company's debt equity ratio is much lower than the industry's position which signifies that the company is better and favourable in the long term solvency position ..So the bank can give long term loan to the company to facilitate its expansion program..

Answer 4:

Supplier ie the creditors of a company are generally more concerned about the cash and liquidity positon of the company..They are also concerned about the current ratio of the company.