Combined Financial Statements

Given the combined financial statements for five years of Carton Industries Company and Dairy Crate Company, ratio analysis has been conducted.

The firm’s decreasing current ratio just means that Carton Industries Company’s ability to pay short-term liabilities through its short-term assets has also been declining but is still relatively acceptable. The same case goes with the firm’s quick ratio with a remarkable decreasing trend from the years 1977 to 1980. Both the current and the quick ratios give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.

        The cash ratio, which is a conservative view of the company’s liquidity because it does not include inventory or accounts receivable as cash or near cash, also decreases. Moreover, cash ratio measures only money the company can access immediately for emergency needs or debts which in Carton’s case is at its lowest in 1980 with 0.04. Lastly, the remarkable drop of working capital from $216,500 to $11,200 is probably caused by the firm’s decreasing sales for the past years and its accounts receivables and inventory management. Although the company's working capital for the year 1980 is still positive, the said ratio being a common measure of its liquidity, efficiency, and overall health does not necessarily state that the company will be able to pay off its short-term liabilities almost immediately. Basing it on the financial statements of the company, it can be observed that almost everything is stable, i.e. its inventory and accounts receivables are rising steadily, except on the side of accounts payable which reached its peak also in 1980 with $247,400 which might be one of the reasons of its low working capital for the said year.

For the profitability ratios, as presented, the return on assets of the company is really low with only 0.01% in 1976 and even having a negative one in 1979 to 1980. The same can be said regarding the company’s return on total capital and return on equity. The ROA and ROTC indicate how efficient the management is in using its assets to generate earnings and returns while the ROE deals with how much a company earns with what its shareholders have invested. The net profit margin also shows an unfavorable trend. It has declined by 0.023 from 1977 to 1978 and it even became negative in the following years, meaning that only a small amount of the company’s revenues is translated into profits. With the calculated figures, we can say that the company’s ability to generate earnings through its assets and equity has not been doing well in the past years even with the acquisition of the Dairy Crate Company.