Riordan Manufacturing, Inc. (Riordan) is a publically held corporation established in 1992, specializing in the manufacturing of plastic injection molding with facilities in California, Michigan, Georgia, and China. In 2000, the company expanded the manufacturing operations to China. Financial reports (Appendix A and B) for the fiscal years 2004 and 2005 depict the financial position of the company. Ratios calculated from Riordan’s financial statements provide an assessment of financial condition and performance. The following ratios using Riordan’s financial statements will be calculated and discussed: 1) liquidity ratios; 2) activity ratios; 3) leverage ratios; 4) profitability ratios; and 5) average P/E.
LIQUIDITY RATIOS: SHORT-TERM SOLVENCY
Table 1: Current Ratio
Current ratio is a Solvency Ratio and according to Leichter (2007) “expresses the working capital relationship of current assets to cover current liabilities”. Leichter (2007), states that “a ratio of 2 to 1 is considered a sign of good financial condition.” The following table provides a comparison of Riordan’s current ratio for 2004 and 2005: 2005 Ratio2004 Ratio
Current assets $14,555.0922.087$14,643,4562.429
In 2004, Riordan’s current ratio was 2.429 and in 2005 the current ratio improved to 2.087. The increase in this ratio provides information to creditors and investors that Riordan is able to pay current liabilities and financially stable.
ACTIVITY RATIOS: ASSET LIQUIDITY, ASSET MANAGEMENT EFFICIENCY
Table 2: Accounts Receivable Turnover Ratio
The accounts receivable (A/R) turnover ratio according to The Free Dictionary (2008) reflects “the number of times in each accounting period that a firm converts credit sales into cash. A high turnover indicates effective granting of credit and collection from customers.” The following table provides a comparison of Riordan’s A/R ratio for 2004 and 2005: 2005 2004
Net sales$50,823,6858.38 times$46,044,2888.14 times
The A/R turnover ratio equals Net Sales divided by Average Accounts Receivable. Riordan is reporting Sales without the division of credit and cash so the Accounts Receivable Turnover Ratio could be smaller.
LEVERAGE RATIOS: DEBT FINANCING AND COVERAGE
Table 3: Debt Ratio
The debt ratio according to Investopedia (2008) “indicates what proportion of debt a company has relative to assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.” Debt Ratio = Total Liabilities divided by Total Assets. Riordan’s debt ratio increased from 2004 to 2005 by .001 which indicates a slight increase in debt relative to assets. 2005 2004
Total liabilities$12,476,927.36$12,160,256 .359
Total assets$34,592,182 $33,856,256
PROFITABILITY RATIOS: OVERALL EFFICIENCY AND PERFORMANCE
Table 4: Gross Profit Margin
Investopdedia (2008) states Gross Profit Margin is the amount of dollars “left over from revenues after accounting for the cost of goods sold.” Gross Profit Margin is calculated by subtracting Cost of Goods Sold from Sales and dividing by Sales or Gross Margin divided by Sales. The table below shows the gross profit margin for Riordan for 2004 and 2005: 2005 2004
Riordan’s gross profit margin was 17% in 2005 and 19% in 2004 which is a decline in profit. Riordan made 17 cents per dollar in 2005 compared to 19 cents per dollar in 2004.
AVERAGE P/E FOR THE MANUFACTURING INDUSTRY
Table 5: Price/Earnings (P/E) Ratios
P/E ratios according to Investopedia (2008) are “a valuation ratio of a company’s current share price compared to its per-share earnings.” P/E Ratio = Market Value per Share divided by Earnings per Share. The table below indicates the plastics manufacturing industry average P/E: Yahoo Finance Industry Averages Price/Earnings
Rubber and Plastics Manufacturers8.6 (Yahoo, 2008)
The Rubber and Plastics Manufactures’ P/E is 8.6 indicating a desirable industry for investors. From 2004 to 2005 Riordan has experienced a marginal decline in Assets but is able to pay liabilities according to the Current Ratio, but the Gross Profit margin declined. The Debit Ratio slightly decreased, but the Account Receivables turnover increased meaning the company is effectively collecting on accounts. The company is successful in maintaining asset value, collecting accounts, and paying liabilities, but should increase the profit from sales by reducing expenses and developing efficient processes.
Accounts Receivable Turnover Ratio. (2008). In The Free Dictionary by Farlex online. Retrieved October 10, 2008 from http://financial-dictionary.thefreedictionary.com Debt Ratio. (2008). In Investopedia Dictionary online. Retrieved October 10, 2008 from http://www.investopedia.com/dictionary Gross Profit Margin. (2008). In Investopedia Dictionary online. Retrieved October 10, 2008 from
http://www.investopedia.com/dictionary Leichter, J. (2007, March). Benchmarking Your Business with Financial Ratio Analysis. Contracting Business, 64(3), 82-84. Retrieved October 9, 2008, from Career and Technical Education database. P/E Ratio. (2008). In Investopedia Dictionary online. Retrieved October 10, 2008 from http://www.investopedia.com/dictionary Yahoo Finance. (2008) Industry Center – Rubber & Plastics. Retrieved October 10, 2008, from http://biz.yahoo.com/ic/322.html