Task: Ratio analysis.
The Corrigan Corporation’s 2004 and 2005 financial statements follow, along with some industry average ratios.
A. Assess Corrigan’s liquidity position, and determine how it compares with peers and how the liquidity position has changed over time.
B. Assess Corrigan’s asset management position, and determine how it compares with peers and how its asset management efficiency has changed over time.
C. Assess Corrigan’s debit management position, and determine how it compares with peers and how its debt management has changed over time
D. Asses Corrigan’s profitability ratios, and determine how they compare with peers and how the profitability position has changed over time.
E. Assess Corrigan’s market value ratios, and determine how their valuation compares with peers and how it has changed over time.
F. Calculate Corrigan’s ROE, as well as the industry average ROE, using the extended Du Pont Equation. From this analysis, how does Corrigan’s financial position compare with the industry average numbers?
G. What do you think would happen to its ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts.
Corrigan Corporation: Balance Sheets as of December 31
|
|
2005
|
2004
|
|
Cash
|
$72,00
|
$65,00
|
|
Accounts receivable
|
439,000
|
328,000
|
|
Inventories
|
894,000
|
813,000
|
|
Total current assets
|
$1,405,000
|
$1,206,000
|
|
Land and building
|
238,000
|
271,000
|
|
Machinery
|
132,000
|
133,000
|
|
Other fixed assets
|
61,000
|
57,000
|
|
Total assets
|
$1,836,000
|
$1,667,000
|
|
Accounts and notes payable
|
432,000
|
409,500
|
|
Accrued liabilities
|
170,000
|
162,000
|
|
Total current liabilities
|
$602,000
|
$571,500
|
|
Long-term debt
|
404,290
|
258,898
|
|
Common stock
|
575,000
|
575,000
|
|
Retained earnings
|
254,710
|
261,602
|
|
Total liabilities and equity
|
$1,836,000
|
$1,667,000
|
Corrigan Corporation: Income Statements for year ending December 31
|
|
2005
|
2004
|
|
Sales
|
$4,240,000
|
$3,635,000
|
|
Cost of goods sold
|
3,680,000
|
2,980,000
|
|
Gross operating profit
|
$560,000
|
$655,000
|
|
General administrative and selling expenses
|
236,320
|
213,550
|
|
Depreciation
|
159,000
|
154,500
|
|
Miscellaneous
|
134,000
|
127,000
|
|
Earnings before taxes (EBT)
|
30,680
|
159,950
|
|
Taxes (40%)
|
12,272
|
63,980
|
|
Net income
|
18,408
|
95,970
|
|
Per share data
|
|
|
|
|
2005
|
2004
|
|
EPS
|
$0.80
|
$4.17
|
|
Cash dividends
|
$1.10
|
$0.95
|
|
Market price (average)
|
$12.34
|
$23.57
|
|
P/E ratio
|
15.4x
|
5.65x
|
|
Number of shares outstanding
|
23,000
|
23,000
|
|
|
|
|
|
Industry financial ratios*
|
|
|
|
|
2.7x
|
|
|
Inventory turnover*
|
7.0x
|
|
|
Days sales outstanding*
|
32 days
|
|
|
Fixed assets turnover*
|
13.0x
|
|
|
Total assets turnover*
|
2.6x
|
|
|
Return on assets
|
9.1%
|
|
|
Return on equity
|
18.2%
|
|
|
Debt ratio
|
50.0%
|
|
|
Profit margin on sales
|
3.5%
|
|
|
P/E ratio
|
6.0x
|
|
|
Price/cash flow ratio
|
3.5x
|
|
|
|
|
|
* (industry financial ratio)-Industry average ratios have been constant for the past 4 years
* (Inventory turnover, fixed assets turnover and total assets turnover)-based on year-end balance sheet figures
* (Days sales outstanding)- Calculation is based on a 365-day year