The Financial Detective, 2005
Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate. Each company within industries has different financial characteristics and strategies which can produce striking differences in financial results for firms in the same industry.
Health Products Industry
Health Products are categorized as highly differentiated products that enjoy high pricing freedom. The companies in this industry can benefit from high gross profit margin of an average of 80%.
Company A – is the world’s largest prescription-pharmaceutical company. In
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Its weakness is the ability in controlling its indirect costs; such as selling and advertising expenses to improve its Net Profit.
Paper Industry
Paper industry is a good example of commodity industry which is subject to strong price competition which would be expected to have a lower gross margin of average of 22%.
Company I – world’s largest maker of paper, paperboard, and packaging. The company has spent the last few years rationalizing capacity by closing inefficient mills, implementing cost-containment initiatives, and selling nonessential assets.
Statement of Problem: Comparing to Company J, the major problem of Company I is its high Long-Term Debt balance. With higher “Total Debt/Total Assets” and “LT Debt/Shareholders’ Equity” ratios, more of its assets have been financed by debts. It has been aggressive in financing its growth with debt. The cause of these actions might be because of its big investment in high capacity paper producing machines. Anyhow, might be because of its maturation, it has more profitability with the money shareholders have invested.
Company J – is a small producer of printing, writing, and technical specialty papers, as well as towel and tissue products.
Statement of Problem: Comparing to Company I, the major strength of Company J is its management of asset. Also, Company J has higher “Net Profit Margin” and “Asset
The gross profit margin and operating profit margin also suffered at 29.5 % (23.49%) and 5.8% respectively (Morning Star, 2014).
The company is the corporation’s question mark performer and has the potential of becoming a star performer given the limited competition in the market. The company has the advantage of the parent corporation’s 25-year-old positive reputation as a local family owned business known for the quality of their products.
a. Determine the value of the firm at the above debt levels. What level of debt should the firm
Based on the financial ratios calculated, it appears that Pinnacle Manufacturing (the “Company”) is both using up cash assets and increasing its debt. The Cash Ratio has declined each of the past three years indicating that the Company has a decreasing ability to pay its current liabilities from cash and will be required to liquidate assets to pay off current liabilities. The Current Ratio has also declined each of the last three years. In 2009, it was 218.6% or 2.186. This means that for every dollar of current liabilities the Company had $2.18 in current assets with which to pay those liabilities.
It is working efficiently within its resources and does not require any additional funds from outside resources for its operations. Its plan to pay off its debt by applying the company’s profits to repay long term debt is a good plan for the company to lessen incidental expenses that relates to it. The company should regularly review its performance and match it against the industry mark in order to ensure that it is functioning at an optimum and effective level which is beneficial to its
Commutronics had not accumulated enough profits and had no sufficient capital reserves. The company’s registered capital was therefore very low. The withholding tax rate of
1. Please conduct a financial ratio analysis using the data in Exhibit 2. How do the results reflect different strategies pursued by the 4 firms?
Based on your analysis above, make at least two (2) recommendations as to how each company could improve its working capital positions. Provide support for your recommendations.
The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s
Also, according to its leverage ratios, the company’s debts are not only very high, but are also increasing. Its decreasing TIE ratio indicates that its capability to pay interests is decreasing. The company’s efficiency ratios indicate that despite the fact that its fixed assets are increasingly being utilized to generate sales during the years 1990-1991 as indicated by its increasing fixed asset turnover ratio, the decreasing total assets turnover indicate that overall the company’s total assets are not efficiently being put to use. Thus, as a whole its asset management is becoming less efficient. Last but not the least, based on its profitability ratios, the company’s ability to make profit is decreasing.
We believe that Company I represents the Smaller Producer of printing papers and Company J represents the World’s Largest Market of Paper.
The case of the Investment Detective laid out the cash flows for us in each of eight different projects. Before doing any calculations we came up with the assumption that we could not rank the projects simply by inspecting the cash flows.
In comparing the companies to each other it is important to take into account the liquidity or ability of a firm to meet its current obligations, and solvency
Another measure of a company’s ability to pay back loans, this time over a long period, measures solvency. Coca-Cola’s debt to total assets ratio is 35% in 2004 and 33% in 2005 compared to PepsiCo’s less attractive ratio of 52% in 2004 to 55% in 2005. Coca-Cola’s debts represent a healthy percentage of assets and in this case the lower the number the better. Coca-Cola’s debt to total assets ratio decreased by 2% from 2004 to 2005 while PepsiCo’s ratio increased by 3%. Were a potential lender or investor to look at these numbers alone they would prefer the performance of Coca-Cola over PepsiCo but there are still many calculations to be made and factors to consider.
Company Y has 2.55, which implies relatively under utilization of the resources. Company X has 1.8, which is preferable