Summary of Martin Manufacturing Company.
As for the liquidity Martin Manufacturing, we can calculate a current ratio of 2.5, and a Quick ratio of 1.3. Analysis of these ratios tells the company's ability to meet its short term obligations. The current ratio can be interpreted as showing that for every $1 in liabilities; the company has $2.50 to meet those obligations. A 1 to 1 ratio would be perfect however in a manufacturing industry operations are difficult to predict, thus $2.50 is a very safe calculation. However the industry average is 1.5 and may show 2.5 as being the symptom of wasted capital that can earn more if allocated properly.
The Quick ratio is the same as the current ratio, however it doesn't include inventory. By taking Martin Manufacturing's inventory figure out of the equation we can see that inventory may be the mechanism for the current ratio's skewing from the norm.
Martin Manufacturing's overall liquidity seems to be in good running, however because of a somewhat shaky time-series evaluation for the current ratio in contrast with quick ratio and the industry average, it may be Martin's best interest check on why their inventory is so suddenly high.
Activity:.
Martin Manufacturing's activities analysis shows a need for improvement. Inventory turnover is consistent from 2001-3, but is only half that of the industry average which was commented about in the liquidity analysis. This may point to too high of inventories, or a possibly a lack of sales, or as can be seen by the average collection period ration, may point to a serious problem with accounts receivable. The collection period has increased with each year and exceeds the industry average by more than ten days. This may be the cause for such a high figure in inventories and thus the possible lack of validity in the current ratio calculation. The Asset turnover shows that asset utilization has increased more than 100%, and is almost 70% higher than the industry average.
