Summary of Financial Ratio Analysis - Financial Management

Table lists all the financial ratios calculated for the Drake Manufacturing Company, summarizing the comparative financial ratio analysis undertaken for the firm. The assessment column to the right of the table contains an evaluation of each of Drake’s ratios in comparison with the industry averages. For example, the firm’s liquidity position is rated fair to satisfactory. Although its current ratio is somewhat below the industry norm, its quick ratio is satisfactory, indicating that Drake probably has sufficient liquidity to meet maturing obligations.

The firm’s asset structure is not generating sufficient sales revenues, however. Drake’s asset management ratios indicate that the firm is investing too much in receivables and inventories, as well as property, plant, and equipment, relative to the sales volume being generated. Thus, Drake should consider implementing more stringent credit and collection policies as well as better inventory controls. The firm should also evaluate its investment in property, plant, and equipment to determine whether reductions could be made without impairing operations.

Drake’s financial leverage ratios indicate that the firm is using significantly more debt to finance operations than the average firm in the industry. Because of its poor coverage ratios, the company may have difficulty obtaining debt financing for further asset additions. In the event of an economic slowdown, Drake’s creditors would probably reevaluate the firm’s borrowing capacity and make less funds available to it.

If Drake wants to restore its borrowing capacity, it should take steps to increase its equity base. The market-based ratios confirm the analysis performed using Drake’s financial statements, and the dividend policy ratios indicate that the firm may have low growth prospects.

Ratio Analysis Summary for the Drake Manufacturing Company

Ratio Analysis Summary for the Drake Manufacturing CompanyRatio Analysis Summary for the Drake Manufacturing Company

It should be emphasized that the ratios discussed in this analysis are interrelated. For example, Drake is using more debt and investing more in receivables and inventories than the average firm in the industry. If the company could reduce its investment in receivables and inventories and use the released funds to lower debt, both the asset management ratios and the financial leverage ratios would be closer to the industry averages.

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