Answer
a. Corrigan’s liquidity position has improved from 2010 to 2011. However, its current ratio is still
below the industry average of 2.7. This could affect the firm’s ability to cover its current debt
obligations.
b. Corrigan’s inventory turnover, fixed assets turnover, and total assets turnover have improved
from year 2010 to 2011. But they are still below the industry averages. The industry’s days
sales outstanding ratio also increased from 2010 to 2011. These means it’s not good. In2010,
its DSO was close to the industry average. While in 2011, it’s DSO is higher. If the industry’s
credit policy does not change, it needs to look at receivables and determine whether it has
any uncollectible. If uncollectible receivables occur, this will make its current ratio worse than
what was calculated above.
c. Corrigan’s debt ratio has increased from 2010 to 2011, which is a sign of weakening. In 2010,
its debt ratio was right at the industry average, but in 2011 it is higher than the industry
average. Given its weak current and asset management ratios, the industry should strengthen
its balance sheet by paying down liabilities.
d. Corrigan’s profitability ratios were declined substantially in year 2010 to year 2011, and they
are substantially below the industry averages. Corrigan needs to reduce its costs, increase
sales, or both.
e. Corrigan’s P/E ratio has increased from 2010 to 2011, but only because its net income has
declined significantly from the prior year. Its P/CF ratio has declined from the prior year and
is well below the industry average. These ratios reflect the same information as Corrigan’s
profitability ratios. Corrigan needs to reduce costs to increase profit, lower its debt ratio,
increase sales, and improve its asset management.
f.
lowering inventory would also improve its debt ratio.
Year Formula
ROE= PM × TA TURNOVER × EQUITY MULTIPLIER
2011
2.22%
0.43%
2.31
2.21