Calculate Corrigan\'s ROE as well as the industry average ROE using the Dupont e

Question

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? What do you think would happen to its ratios if tin- 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. RATIO ANALYSIS The Corrigan Corporation's 2010 and 2011 financial statements follow, along with some industry average ratios. Assess Corrigan's liquidity position and determine how it compares with peers and how the liquidity position has changed over time. Assess Corrigan's asset management position and determine how it compares with peers and how its asset management efficiency has changed over time. Assess Corrigan's debt management position and determine how it compares with peers and how its debt management has changed over time. Assess Corrigan's profitability ratios and determine how they compare with peers and how it profitability position has changed over time. Assess Corrigan's market value ratios and determine how its valuation compares with peers and how it has changed over time.

Explanation / Answer

Industry 2011 2010 average Current ratio (current assets/current liabilities) 2.3 2.1 2.7 Inventory turnover (cost of goods sold/inventory) 4.1 3.7 7.0 Days sales outstanding (Accounts receivable*365/Sales)--in days 37.8 32.9 32.0 Fixed assets turnover (Sales/fixed assets) 9.8 7.9 13.0 Total assets turnover (Sales/Total assets) 2.0 2.2 2.6 Return on assets (Net Income/Total assets) 1.0% 5.8% not clear Return on equity (Total Asset turnover*Profit margin*Equity multiplier) 1.9% 11.5% 18.20% Equity multiplier (Total Assets/Equity) 221.3% 199.3% Debt to assets ratio (Long term debt/Total Assets) 22.0% 15.5% 50% Profit margin (Net Income/Sales) 0.4% 2.6% 3.50% P/E Ratio (Market price per share/EPS) cannot be calculated as Price/Cash flow ratio (MPS/Operating cash flow per share) details are not available in the question a) The current ratio, the basic liquidity ratio, though lower than the industry average is above the standard ratio of 2. The ratio has improved in 2011. It indicates a comfortable short term liquidity position. b) The turnover ratios, which reflect the efficiency with which the assets are managed, are lower than industry standards, especially the inventory turnover ratio and fixed assets turnover ratio. These have to be improved. The days sales outstanding though in line with industry standards in 2010 is high in 2011, which needs to be brought down by improved credit and collection policy. c) The debt component in total financing is much less than industry average of 50%. The ratio has increased in 2011 by 6.5 percentage points. It indicates that the firm is adopting a policy of low financial leverage. d)The profit margin ratio is lower than the industry standards and is very low in 2011. It has drastically gone down from 2.6% in 2010 to 0.4% in 2011. Needs to be investigated and corrected. e) Details of market price and no of shares are not given to find the P/E ratio and Price/Cash flow ratio. f) The industry average is very high at 18.2%. The ratio is low for the firm and has gone down considerbly in 2011 to a very low 1.9%. The ROE may be lower due to the low financial leverage of Corrigan compared to the industry average Debt/equity of 1 g) If inventory is reduced substantially so also the COGS, then the inventory turnover would improve and the profitability ratios like Profit margin, return on total assets, ROE etc., would improve.

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