Fm4 22 - The firm’s liquidity ratios are low most of its asset management ratios are poor(except fixed assets turnover its debt management ratios

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Mini Case: 4 - 22 h. Use the extended Du Pont equation to provide a summary and overview of Computron’s financial condition as projected for 2008. What are the firm’s major strengths and weaknesses? Answer: Du Pont Equation = Margin Profit × Turnover Assets Total × Multiplier Equity = 3.6% × 2.0 × ($3,516,952/$1,977,152) = 3.6% × 2.0 × 1.8 = 13.0%. Strengths: The firm’s fixed assets turnover was above the industry average. However, if the firm’s assets were older than other firms in its industry this could possibly account for the higher ratio. (Computron’s fixed assets would have a lower historical cost and would have been depreciated for longer periods of time.) The firm’s profit margin is slightly above the industry average, despite its higher debt ratio. This would indicate that the firm has kept costs down, but, again, this could be related to lower depreciation costs. Weaknesses:
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: The firm’s liquidity ratios are low; most of its asset management ratios are poor (except fixed assets turnover); its debt management ratios are poor, most of its profitability ratios are low (except profit margin); and its market value ratios are low. i. What are some potential problems and limitations of financial ratio analysis? Answer: Some potential problems are listed below: 1. Comparison with industry averages is difficult if the firm operates many different divisions. 2. Different operating and accounting practices distort comparisons. 3. Sometimes hard to tell if a ratio is “good” or “bad.” 4. Difficult to tell whether company is, on balance, in a strong or weak position. 5. “Average” performance is not necessarily good. 6. Seasonal factors can distort ratios. 7. “Window dressing” techniques can make statements and ratios look better....
View Full Document

This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

Ask a homework question - tutors are online