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4-27. A. The results for Carver Industries are shown below. The values boldfaced for 2010
are improvements over 2009.
B. and D. We can evaluate Carver’s relative performance by considering both their trend
(2010 vs. 2009), and their comparisons to the industry average. We will use both of these
approaches for the firm’s liquidity, capital structure, asset management efficiency, and
profitability ratios.
LIQUIDITY
The liquidity ratios are the current ratio, acid-test ratio, average collection period, and
accounts receivable turnover.
Current ratio: Carver’s current ratio has deteriorated over the last year. While its current
assets have stayed relatively stable (45% vs. 41% of total assets for 2009 and 2010,
respectively), the current liabilities have blown up in 2010, going from 24% of total assets
to 46%. The firm’s accounts payable have more than doubled, and short-term bank notes
have almost tripled. The firm now has a current ratio that is less than half of the industry
average, suggesting compromised liquidity.
Acid-test ratio: The acid-test ratio tells a similar bleak story. While the firm’s ratio was
close to the industry average in 2009, it has fallen to about ¼ of that value in 2010.
Accounts receivable has remained relatively stable over this period; inventory, however,
rose from about 26% of total assets to 30%. However, the real story here is cash and the
huge swelling in current liabilities in 2010: Cash fell from 8% of total assets to 0.3%.
Carver’s cash has disappeared, and has dragged its acid-test ratio along with it. The firm is
dangerously lacking in liquidity, especially given current liabilities, which have increased
160% year/year.
Inventory turnover: Carver’s inventory turnover is higher than the industry average, and
has increased significantly over the last year. The firm’s cost of goods sold more than
doubled, while inventory only increased by 63%. This is one bright spot for Carver.
Average collection period: Carver’s ACP is improving from a level that was already better
than the industry average. The firm receives cash for its sales after about 19 days, while
the industry average is 37. The firm’s A/R has only increased by a third, even though its
sales more than doubled. This is an impressive result.
Thus the ratios involving income statement values look OK for Carver, but its current asset
and current liability situations—especially its low cash—are troubling.
CAPITAL STRUCTURE
The firm’s relevant capital structure ratios are the debt ratio and the times interest earned
ratio.
Debt ratio: The firm’s debt ratio has risen over the year, but is not much higher than the
