Edna Millay Inc. is a manufacturer of electronic components and accessories with total assets of $20,000,000. Selected financial ratios for Millay and the industry averages for firms of similar size are presented below.

Edna Millay	2017 Industry
	2015	2016	2017	Averages
Current ratio	2.09	2.27	2.51	2.24
Quick ratio	1.15	1.12	1.19	1.22
Inventory turnover	2.40	2.18	2.02	3.50
Net sales to stockholders’ equity	2.71	2.80	2.99	2.85
Return on common stockholders’ equity	0.14	0.15	0.17	0.11
Total liabilities to stockholders’ equity	1.41	1.37	1.44	0.95

Millay is being reviewed by several entities whose interests vary, and the company’s financial ratios are a part of the data being considered. Each of the parties listed below must recommend an action based on its evaluation of Millay’s financial position.

Archibald MacLeish Bank. The bank is processing Millay’s application for a new 5-year term note. Archibald MacLeish has been Millay’s banker for several years but must reevaluate the company’s financial position for each major transaction.

Robert Penn Warren. A brokerage firm specializing in the stock of electronics firms that are sold over-the-counter, Robert Penn Warren must decide if it will include Millay in a new fund being established for sale to Robert Penn Warren’s clients.

Working Capital Management Committee. This is a committee of Millay’s management personnel chaired by the chief operating officer. The committee is charged with the responsibility of periodically reviewing the company’s working capital position, comparing actual data against budgets, and recommending changes in strategy as needed.

Instructions

c) Discuss what the financial ratios presented in the question reveal about Millay. Support your answer by citing specific ratio levels and trends as well as the interrelationships between these ratios.

Step by step solution

01

Meaning of Financial Ratios

A financial ratio is a tool that compares a company's financial position or production to that of competitors. It might be a tool used by financial experts to research and collect information about a company's financial history or the whole trade division.

02

Explaining the financial ratios presented to the reveal about Millay

Edna Millay Inc. shows up to have a solid liquidity position as proven by the current and quick proportions that have been moving forward over the three-year period. In expansion, the current ratio is more prominent than the industry normal and the quick ratio is fair somewhat underneath.

In any case, the increment within the current proportion can be due to an increment in inventory levels. This reality is affirmed by the breaking down inventory turnover ratio that's too underneath the industry normal. Overstock or out-of-date stock conditions may exist.

Edna Millay’s benefit is good as demonstrated by the profitability ratios that have been expanding. Both profitability ratios are more prominent than the industry normal. The benefit edge on sales (net income to net sales) can be inferred from these two proportions (net wage to common stock equity and net sales to common stock equity), and Millay’s edge has expanded each year (2015: 5.17%; 2016: 5.36%; 2017: 5.69%) and surpasses the industry average (3.86%).

The entire liabilities to equity proportion has expanded over the three-year periodand surpasses the industry average, demonstrating an overwhelming reliance on debt. This high leverage position may well be perilous if sales volume, sales edge, or pay falls since the intrigued cost may be a fixed cash outlay.

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