1. See Appendix A
2. Liquidity ratio. The firm’s liquidity shows a downward trend through time. The current ratio is decreasing because the growth in current liabilities outpaces the growth of current assets. The quick ratio is also declining but not as fast as the current ratio. From 1991 to 1992, it only decreased 0.35 units while the current ratio decreased 0.93 units. Looking at the common size balance sheet, we also see that the percentage of inventory is growing from 33% to 48% indicating Mark X could not convert its inventory to cash.
Debt Ratios. Mark X’s debt management is also getting worse, increasing from 40% in 1990 to 59% in 1992. The growth of debt outpaces the growth of assets as seen in the debt ratio. The TIE is …show more content…
7. (Refer to Appendix B) If the bank suddenly decides to withdraw the entire line of credit which is 18,233 for the short term loan and 9,563 for the long term loan, Mark X would have to pay a total of 27,796. Their 1992 cash balance of 3,906 would not be enough to pay the loans. With this, the company has two alternatives. First, they can demand immediate payment from their customers. If they collect at least enough from their accounts receivables, they can use the money to pay for their existing loans. However, if they fail to collect the money within 10 days, (as required by the bank) the other alternative would be to file for bankruptcy.
8. The validity of comparative ratio analysis will be questionable in at least two instances: (1) there are uncontrollable changes and (2) the companies are not similarly sized. A small-sized company cannot be expected have the same ratios as a large-sized business. Large businesses have the advantage of economies of scale. For example, a large corporation can have larger earnings per fixed asset because of their large market share compared to the small company that uses the same technology but have a smaller market share. It is also not wise to compare one year to another when the economy is suffering from recession and other causes. In recessions, it is not recommendable that the earnings per share be compared to the previous year. This might give fault to the wrong department and not