Mark X

Ratio Analysis

Table 6 provides the key ratio of Mark X, which includes the liquidity ratios, debt management ratios, asset management ratios, profitability ratios, Altman Z factors and payout ratios. The ratios calculated for 1993 and 1994 are based on the assumption that the bank is willing to maintain the present credit lines and to grant an additional $6,375,000 of short-term credit, and cash balance is 5% of sales.

Liquidity ratio analysis

According to Table 6, Mark X has higher current ratios than the average for its industry in the year 1990 and 1991, but from 1992 to the results of forecast in 1994, the current ratios are lower than the industry average, which indicate that Mark X is getting into financial difficulty, and it will pay its liabilities more and more slowly. However, on the other side, except for the year 1992, Mark X has higher quick ratios than its industry average. Although Mark X has lower current ratios, its quick ratios are high in comparison with other firms in its industry, and it still has greater ability to meet its short-term obligations.

Debt management ratio

The debt ratios of Mark X are lower than its industry average in 1990 and 1991, however, the ratio is increasing significantly since 1992. One main reason for the increasing debt ratios is that Mark X makes both long-term and short-term loans to finance its rising inventories and receivables. In order to acquire new capital, the company finances another large short-term loan, which makes the situation worse. Another reason is that Mark X tends to delay the payments of the accounts payable to retain the cash. All factors mentioned contribute to the increasing debt ratios. The contractual limit is 55% while the debt ratio of Mark X is 59.8%, thus Mark X has a great risk in 1992 that it should pay all the loans to the bank immediately, otherwise, it can be forced into bankruptcy. Although the forecasts show that the ratios are decreasing, it still has potential risks.

As with the times interest earned ratio, it falls down very low in 1992, which is 4.42 comparing with the industry average 7.7, that means Mark X covers its interest expense by a much low margin of safety. Such low ratio may be caused by the high cost of goods sold and depreciation expense (shown in Table 4), while the interest expenses increase significantly on short-term, long-term loans and mortgage. Therefore, the same conclusion can be made that Mark X would face difficulties if it attempts to borrow additional funds.

Asset management ratio

The inventory turnovers are decreasing since 1991, and begin to fall below the industry average in 1992, which indicate that Mark Z ties too much funds to the inventory than other firms in its industry. The inventory turnovers are consistent with the quick ratios.

Fixed asset turnovers fluctuate from 1990 to 1994. This is because the net sales and fixed assets do not increase in the same proportion. However, the total asset turnovers decrease year by year and are below the industry average, indicating that Mark X is not generating a sufficient volume of business given its investment. Shown by the Table 1 and Table 2, both total assets and net sales increase year after year, and we could conclude that the increasing of sales is not enough to cover the asset investment. Therefore, we would suggest Mark X take actions to increase the sales, or make an alternative, sell some assets.

Days sales outstanding ratios are much larger in Mark X. The industry average is 32 days, but in 1992, this data of Mark X is 53.99, nearly twice as large as the average level. The days sales outstanding shows that Mark X collects money much more slowly than its competitors, which because it relaxes its credit standards in early 1992. Too much funds tied up to inventory and accounts receivable negatively affects the re-investment.

Profitability ratios

As to the profitability ratios, all the profitability ratios in 1992 decrease significantly below the industry average. Interest expenses make a large contribution to the results because of the tremendously increased short-term loans and delayed payment of accounts payable. The profitability ratios in other years are fluctuating, while in 1994, all the ratios, including profit margin, gross profit margin, ROA and ROE are higher than its industry average. They indicate that Mark X's financial performance is improving, which is a good sign for the company. The improving profitability ratios, especially the ROA and ROE, tell shareholders and other potential investors that Mark X provides more return than other firms in its industry.

Du Pont analysis

Under Du Pont analysis, the ROE = (Profit margin)*(Asset turnover)*(Equity multiplier), in Mark X's case, the profit margin and asset turnover decrease from 1991 to 1992, while the equity multiplier increases from 1991 to 1992, but increases in relatively smaller proportion, therefore,