Avantronics is a manufacturer of electronic components and accessories that has total assets of $ 20,000,000. Selected financial ratios for Avantronics and the industry averages for firms of similar size are as follows: Avantronics Industry
Year 1 Year 2 Year 3 Average
Current ratio 2.09 2.27 2.51 2.24
Quick ratio 1.15 1.12 1.19 1.22
Inventory turnover 2.40 2.18 2.02 3.50
Profit margin 0.14 0.15 0.17 0.11
Debt- to- equity ratio 0.24 0.37 0.44 0.35
Avantronics is being reviewed by several entities whose interests vary, and the company's financial ratios are a part of the data being considered. Each of the following parties must recommend an action based on its evaluation of Avantronics's financial position: MidCoastal Bank. The bank is processing Avantronics's application for a new five- year term note. MidCoastal has been the banker for Avantronics for several years but must reevaluate the company's financial position for each major transaction. Ozawa Company. Ozawa is a new supplier to Avantronics and must decide on the appropriate credit terms to extend to the company. Drucker & Denon. A brokerage firm special-izing in the stock of electronics firms that are sold over the counter, Drucker & Denon must decide whether it will include Avantronics in a new fund being established for sale to Drucker & Denon's clients. Working Capital Management Committee. This is a committee of Avantronics's management personnel chaired by the chief operating officer. The committee is responsible for periodically reviewing the company's working- capital position, comparing actual data against budgets, and recommending changes in strategy as needed.
A. Describe the analytical use of each of the five ratios presented in the chart. For this question consider/discuss the following: Current Ratio, Quick Ratio, Inventory turnover, Profit margin, and Debt to equity.
B. For each of the four entities described, identify the financial ratios, from those ratios presented, that would be most valuable as a basis for its decision regarding Avantronics. For this question consider/discuss the following: MidCoastal BankU, Ozawa Company, Drucker & Denon, and Working Capital Management Committee
C. Discuss what the financial ratios presented in the question reveal about Avantronics. Support your answer by citing specific ratio levels and trends, as well as the interrelationships among these ratios. For this question consider/discuss the following: Current and Quick ratios, Inventory turnover, Profit margin, and Debt to equity.