Question

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The Corrigan Corporation's 2011 and 2012 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 Corrgigan's debt management position and determine how it compares with peers and how its debt management has changed over time. PROBLEM Ch4/Q24 d. Assess Corrigan's profitability ratios and determine how they compare with peers and how its profitability position has changed over time. e. Assess Comrigan'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 inventoryy 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

Answer 1

a]

Current ratio = current assets / current liabilities

2012 = 1405000 / 602000 = 2.33

2011 = 1206000 / 571500 = 2.11

The industry average is 2.7.

Compared to the industry, the liquidity position is inferior as the current ratio is lower.

The liquidity position has improved over time.

b]

Fixed asset turnover = sales / fixed assets

2012 = 4290000 / (238000 + 132000 + 61000) = 9.95

2012 = 3635000 / (271000 + 133000 + 57000) = 7.89

The industry average is 13.0.

Compared to the industry, the asset management position is inferior as the turnover ratio is lower.

The asset management position has improved over time.

c]

Debt ratio = (long term debt + current liabilities) / total assets

2012 = (404290 + 602000) / 1836000 = 54.8%

2011 = (258898 + 571500) / 1667000 = 49.8%

The industry average is 50.0%.

Compared to the industry, the debt management position is inferior as the debt ratio is higher. However, in 2011 the ratio was lower than the industry average.

The debt management position has deteriorated over time.

d]

Profit margin = net income / sales

2012 = 108408 / 4290000 = 2.5%

2011 = 95970 / 3635000 = 2.6%

The industry average is 3.5%.

Compared to the industry, the profitability is inferior as the profit margin is lower.  

The profitability has decreased over time.

Return on assets = net income / total assets

2012 = 108408 / 1836000 = 5.9%

2011 = 95970 / 1667000 = 5.8%

The industry average is 9.1%.

Compared to the industry, the profitability is inferior as the return on assets is lower.  

The profitability has increased over time.

Return on assets = net income / (common stock + retained earnings)

2012 = 108408 / (575000 + 254710) = 13.1%

2011 = 95970 / (575000 + 262602) = 11.5%

The industry average is 18.2%.

Compared to the industry, the profitability is inferior as the return on equity is lower.  

The profitability has increased over time.

Answer 2

Profit margin = net income / sales 2012 = 108408 / 4290000 = 2.5% 2011 = 95970 / 3635000 = 2.6% The industry average is 3.5%. Compared to the industry, the profitability is inferior as the profit margin is lower.   The profitability has decreased over time. Return on assets = net income / total assets 2012 = 108408 / 1836000 = 5.9% 2011 = 95970 / 1667000 = 5.8% The industry average is 9.1%. Compared to the industry, the profitability is inferior as the return on assets is lower.   The profitability has increased over time. Return on assets = net income / (common stock + retained earnings) 2012 = 108408 / (575000 + 254710) = 13.1% 2011 = 95970 / (575000 + 262602) = 11.5% The industry average is 18.2%. Compared to the industry, the profitability is inferior as the return on equity is lower.   The profitability has increased over time.