Question
1. ElectroStar Corporation is a manufacturer of electronic components with total assets of $20,000,000. Selected financial ratios for ElectroStar and the industry averages for firms
1. ElectroStar Corporation is a manufacturer of electronic components with total assets of $20,000,000. Selected financial ratios for ElectroStar and the industry averages for firms of similar size are as follows:
ElectroStar
Industry
2012 2011 2010 Average
Current ratio . . . . . . . . . . . . . . 2.61 2.32 2.09 2.28
Acid-test ratio . . . . . . . . . . . . . 1.21 1.12 1.15 1.22
Inventory turnover . . . . . . . . . 2.02 2.18 2.40 3.50
Return on equity . . . . . . . . . . . 0.17 0.15 0.14 0.11
Debt-equity ratio . . . . . . . . . . . 1.44 1.37 1.41 0.95
ElectroStar is under review by several entities whose interests vary, and the companys financial ratios are part of the data being considered. Each of the following parties must recommend an action based on its evaluation of ElectroStars financial position. ElectroStar has given the requested informationto each party on a confidential basis.
- MidCoastal Bank. The bank is processing ElectroStars application for a new five-year note. MidCoastal has been ElectroStars banker for several years, but must evaluate the companys financial position for each major transaction.
- Ozawa Company. Ozawa is a new supplier to ElectroStar and must decide on the appropriate credit terms to extend to the company.
- Drucker & Denon. A brokerage firm specializing in the stock of electronics firms, Drucker & Denon must decide if it will include ElectroStar in a new mutual fund being established for sale to Drucker & Denons clients.
- Working Capital Management Committee. This is a committee of ElectroStars management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the companys working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.
Required:
- Describe the analytical use of the given ratios.
- For each of the four entities described above, identify two financial ratios from those ratios presented that would be most valuable as a basis for its decision regarding ElectroStar.
- Comment the performance of ElectroStar based on the five ratios given above.
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