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Current Ratio Total Current Assets or Total Current Liabilities Industry Median 15
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2001 21
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The current ratio provides a rough indication of a company s ability to service its obligations due within one year Progressively higher ratios signify increasing ability to service short-term obligations
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Quick Ratio Cash and Equivalents Receivables or Total Current Liabilities Industry Median 8
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2001 18
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Financial Analysis
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The quick, or acid test, ratio is a re nement of the current ratio and more thoroughly measures liquid assets of cash and accounts receivable in the sense of ability to pay off current obligations Higher ratios indicate greater liquidity as a general rule
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(Income Statement) Sales or Receivables (Balance Sheet) 12 Mo 2001 53 Industry Median 70
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Sales/Receivable Ratio
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1998 59
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Note: Balance sheets for 1998 to 2000 have not been previously shown, but I ve calculated them for general reference This will be true for the following as well
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This is an important ratio and measures the number of times that receivables turn over during the year Our target company seems to turn these over more slowly than the industry median Signi cant to note, however, is the very small write-off of bad debt on their income statements This should trigger a look-see at receivable aging Perhaps more needs to be written off, or agreements with customers might suggest this to be standard to the target company
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Day s Receivable Ratio 365 or Sale/Receivable Ratio 6 Mo 2001 60 Industry Median 50 days
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1998 62
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1999 40
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2000 73
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This highlights the average time in terms of days that receivables are outstanding Generally, the longer that receivables are outstanding, the greater the chance that they may not be collectible Slow-turnover accounts merit individual examination for conditions of cause
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Cost of Sales/Payables Ratio Cost of Sales or Payables 6 Mo 2001 46 Industry Median 73
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1998 59
1999 48
2000 66
Small Manufacturer Valuation
Generally, the higher their turnover rate, the shorter the time between purchase and payment Higher turnover, which our target company appears to experience, supports income statement cash ow strengths to pay bills in spite of slower receivable collections This practice may be somewhat misguided in light of investment principles whereby one normally attempts to match collections relatively close to payments so that more business income can be directed into the pockets of owners
Sales/Working Capital Ratio Sales or Working Capital 6 Mo 2001 42 Industry Median 69
1998 44
1999 46
2000 29
Note: Current assets less current liabilities equals working capital
A low ratio may indicate an inef cient use of working capital, whereas a very high ratio often signals a vulnerable position for creditors Our target company has been below the median, and with exception for 2000, may be modestly inef cient in the use of its working capital To analyze how well inventory is being managed, the cost of sales to inventory ratio can identify important potential shortsightedness
Cost of Sales/Inventory Ratio Cost of Sales or Inventory 6 Mo 2001 59 Industry Median 47
1998 53
1999 59
2000 81
A higher inventory turnover can signify a more liquid position and/or better skills at marketing, whereas a lower turnover of inventory may indicate shortages of merchandise for sale, overstocking, or obsolescence in inventory
Conclusion
There are, of course, a number of other nancial analyses we might conduct, but from visual inspection and brief ratio analysis, it can be reasonably concluded that our target company presents a solid base upon which to commence the valuation estimate Perhaps there is a bit of wiggle room
The Valuation Exercise
in management of collections and working capital, but I would see this weakness as a plus in the eyes of prudent buyers The balance sheet is strong, sales and pro ts have been growing quite dependably, opportunities exist for product-line expansion, and the target company enjoys a niche market hold Manufacturing companies in general hold the highest esteem in the eyes of buyers, and this particular company stacks up well within that perceptive esteem Technology is repetitively applied and can be learned with relative ease by nontechnical prospective buyers The founder and present owner has a degree in liberal arts Thus we must weigh sex appeal into our mathematical equation because all of the right things are right to the discerning eyes of buyers as long as the price is also right What, then, is the right price