Avery Calculation

1. Calculate the key financial ratios (for the years 1988, 1994, 1995, 1996) for Avery Products, Inc... Analyze the trends for each ratio. Compare to the industry average.

2. What strengths and weaknesses are revealed by the ratio analysis?

Ratios | 1988 | 1994 | 1995 | 1996 | Industry average 1996 |

Quick ratio | 1.6 | 2.1 | 1.0 | 0.6 | 1 |

Current ratio | 3.1 | 4.2 | 2.6 | 1.8 | 2.7 |

Inventory turnover | | 9 | 5 | 3 | 7 |

Avg. collection period | | 34 | 37 | 50 | 32 |

Fixed-asset turnover | | 11.6 | 10.7 | 12.4 | 13.0 |

Total asset turnover | | 3.2 | 2.6 | 1.9 | 2.6 |

Return on total assets | | 24.3% | 12.9% | 5.6% | 11.70% |

Return on net worth | | 32.5% | 13.9% | 7.4% | 23.40% |

Debt ratio | 32% | 23% | 33% | 48% | 50% |

Profit margin on sales | | 5% | 3% | 2% | 4.50% |

3. What amount of internal funds would be available for the retirement of the loan? If the bank were to grant the additional credit and extend the increased loan from a due date of February 1, 1997, to June 30, 1997, would the company be able to retire the loan on June 30, 1997? HINT: To answer this question, consider profits and depreciation as well as the amount of inventories and receivables that would be corned if Avery Products' inventory turnover and average collection period were at industry average levels, that is, generating funds by reducing inventories and receivables to industry averages. Also, round 1997 sales to $2.9 million in answering this question.)

4. On the basis of your financial analysis, do you believe that the bank should grant the additional loan and extend the entire line of credit to June 30,1997?

5. If the credit extension is not made, what alternatives are open to Avery Products?

6. Under what circumstances is the validity of comparative ratio analysis questionable?