Zauner Ornaments

Case: Avery Products

Questions:

1) Calculate the key financial ratios for Avery Products, Inc., and plot trends in the firm’s ratios against the industry average.

Ratios A B C Industry Average

Quick Ratio 2.08

0.97 0.61 1

Current Ratio 4.16

2.6 1.84 2.7

Inventory Turnover 41.5 66.6 104.34 51.42

Average collection period 33.27 36.29 48.91 32

Fixed-Asset turnover 11.6 10.71 12.39 13

Total-Asset Turnover 3.13 2.57 1.95 2.6

Return on total assets 15.77% 8.40% 3.62% 11.7%

Return on net worth 49.36% 21.59% 7.06% 23.4%

Debt ratio 17.49%

29.26% 45.70% 50%

Profit-Margin on Sales 5% 3.27% 1.86% 4.5%

Gross Profit Margin 20% 20% 20% N/A

2) What strengths and weaknesses are revealed by the ratios?

Quick Ratio: The declining quick ratio is hinting towards problems with cash flows and probably higher liabilities.

Current Ratio: Avery is also having problems with liquidity as its current ratio has been on a downward trend.

Inventory Turnover: We can relate the inventory turnover rise to the problems with liquidity. As they are not moving the products fast enough they have liquidity problems.

Average Collection Period: A rise in the collection period shows us that they are having problems collecting on accounts receivable.

Fixed asset turnover: It is pretty much on par with the industry average.

Total Asset Turnover: Indicative of higher assets or lower sales meaning more cash input and lower payments received.

Return on Total Asset: Once again the cost of goods sold is higher than usual.

Return on Net Worth: Indicative that the liabilities far exceed the net income.

Debt Ratio: Total Debt has been constantly rising but still not a problem as its below the industry average yet.

Profit Margin On Sales: COGS has gone up and sales are up but at lower profits and hence a lower profit margin on sales.

Gross Profit Margin: Been constant throughout showing proper price calculations.

3) In C, Avery Products’ return on equity was 7% versus 23.4% for the industry. Use the Dupont equation to pinpoint the factors causing Avery Products to fall so far below the industry average.

To meet the industry average the basically need to try and keep the asset turnover constant but they need to quickly increase their returns on assets i.e. basically have better profits and lower COGS. They also need to rein in their leverage as it looks as though they are headed into high debts and then eventually have debt and interest problems.

4) What amount of internal funds would be available for the retirement of the loan? If the bank were to grant the additional credit and extend the increased loan from a due date