Comprehensive Financial Analysis of Milroy Manufacturing: Performance Evaluation and Investment Recommendation

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Running Head:Milroy Manufacturing Financial Analysis1Milroy Manufacturing Financial AnalysisStudent NameCourse NameInstructor NameDatePerform a comprehensive financial analysis of Milroy Manufacturing using ratio analysis, DuPont analysis, and industry benchmarking based on the data provided forthe years 2009-2011.Discuss the company's performance in areas such as liquidity, profitability, asset efficiency, anddebt management relative to the industry. Identify the key strengths and weaknesses of thecompany and provide a recommendation regarding the potential investment in the company.(Word count: 1,800-2,000 words)

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Running Head:Milroy Manufacturing Financial Analysis2Executive SummaryThe present report involves a detailed financial analysis of Milroy Manufacturing to facilitate thedecisionmaking process with respect toinvestment in the company.In order to perform thefinancial analysis the tool of ratio analysis was carried out on the financial statements of thecompany for the period 2009-2011.The position of the company with respect to liquidity, assetefficiency, debt, profitability and growth rate in sales and earnings have been discussed relativeto the industry besides analyzing the underlying trends in the key ratios to understand thestrengths and weaknesses of the company.In addition to ratio analysis Du Pont analysis has been performed to analyze the factorsresponsible for the change in Return on Equity of the company. The report concludes bymakinga recommendation with respect to investment decision in the company.Company BackgroundMilroy Manufacturing is a firm specialized in production of components and parts used in smallelectric motors that in turn are used in appliances such as blenders, fans etc. The company hasenjoyed a strong annual sales growth of 25% in the period 2009-2011.The company’s financialstatements for the same period are presented in Appendix 1. The company has approached Mr.Edwards with a proposal to buy a 20% stake in Milroy Manufacturing primarily to payout to aretiring founder in cash.Ratio AnalysisThe ratioanalysis for Milroy Manufacturing is presented in the exhibit below:

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Running Head:Milroy Manufacturing Financial Analysis3Liquidity RatiosThe current ratio and the quick ratio of a company measure the ability of a firm to meet short-term obligations with current assets and most liquid current assets (excluding inventory)respectively. Fromthe above exhibit it is evident that both the ratios have exhibited decliningtrend in the period 2009-2011 implying declining liquidity position of the companyand in turnincreasing risk of defaulting on short-term obligations.However as the current ratio is greaterthan 1 in all the years while quick ratio is close to 1 means that the company still enjoys acomfortable liquidity position at the end of 2011.Debt RatiosThe Times Interest Earned ratio measures theability of a firm to meet debt obligations such asinterest payments from its operating profits while the debt ratio represents the extent of debt usedin the capital structure to finance asset purchase.It is important to note that with increasing debtratio and decreasing Times Interest earned ratio, the financial risks in the form of bankruptcyrisks of a firm increases and vice versa.The Times Interest Earned ratio of the company hasEquations200920102011Current Ratio(Current Assets)/(Current Liabilities)2.041.721.31Quick Ratio(Current Assets - Inventory)/(Current Liabilities)1.000.950.78Times Interest Earned Ratio(EBIT)/(Interest Expense)4.574.133.06Debt Ratio(Total Liabilities)/(Total Assets)49.58%52.12%59.23%Receivables Turnover Ratio(Sales)/(Accounts Receivables)7.066.996.06Average Collection Days365/Receivables Turnover Ratio51.7152.2060.25Inventory Turnover Ratio(Cost of Goods Sold)/(Inventory)3.483.984.52Total Asset Turnover Ratio(Sales)/(Total Assets)1.091.110.89Profit Margin(Net Income)/(Sales)7.35%6.12%6.38%Return on Assets (ROA)(Net Income)/(Total Assets)8.02%6.80%5.70%Return on Equity (ROE)(Net Income)/(Shareholders' Equity)15.90%14.20%13.98%Growth in Sales(Sales in Yeart/Sales in Yeart-1) -1-25.00%25.00%Growth in EPS(EPS in Yeart/ EPS in Yeart-1) -1-4.08%2.94%Milroy ManufacturingFinancial RatiosLiquidity RatiosDebt RatiosAsset Efficiency RatiosProfitability RatiosGrowth Ratios

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