AC Speed Corporation

Memo
To:

General Manager

From:
Date:
RE:

Financial Ratio Analysis

The purpose of this memorandum is to report on the financial ratio analysis for the years
ending December 31, 2010, 2009, and 2008. The analysis includes an evaluation of AC
Speed's performance trend relative to liquidity, profitability and solvency for the three
years. The analysis also includes an evaluation of AC Speed's performance relative to
other firms in the industry. Finally, there is an evaluation of AC Speed's current debt
ratio and how it may be viewed by AC Speed's banker if AC Speed requests additional
bank loan.
Liquidity and Efficiency
The current ratio measures the amount of current assets to every dollar owing in the
current liabilities. AC Speed's current ratios for the 3 years are 2.3, 2.1, and 2.1
respectively. The trend for the 3 years is improving from 2.1 to 2.3. The industry
average is 2.2. The current ratio indicates AC Speed can repay 2.3 times of its current
liabilities. The composition of AC Speed's current assets is important to an evaluation of
immediate short-term debt-paying ability. The acid test ratio measures the amount of
cash, short-term cash investments and current receivables to every dollar owing in the
current liabilities. AC Speed's acid test ratios for the 3 years are 1.5, 1.3, and 1.3. The
trend for the 3 years is improving from 1.3 to 1.5. The industry average is 1.5. Overall,
AC Speed's liquidity ratios compare favourably to other firms in the industry.
AC Speed's receivables turnover measures its efficiency of collection. AC Speed's
receivables turnover ratios for the 3 years are 10.1, 10.2, and 9.5 respectively. The
trend for the 3 years is improving from 9.5 to 10.1. The industry average is 10. AC
Speed compares favourably to other firms in the industry.
AC Speed's inventory turnover measures its efficiency of inventory management. AC
Speed's inventory turnover ratios for the 3 years are 12.4, 11.4, and 10.4 respectively.
The trend for the 3 years is improving from 10.4 to 12.4. The industry average is 9.5.
AC Speeds inventory turnover of 12.4 is higher than the industry average of 9.5. It
indicates that AC Speed's need for working capital is relatively lower than the industry
average.

Profitability
The Profit Margin expresses net income as a percentage of net sales. AC Speed's
profit margins for the 3 years are 1.69%, 1.66%, and 3.75% respectively. The trend is
decreasing from 3.75% to 1.69%. It is alarming that AC Speed's profit margin
decreased by more than half from 2008 to 2010. The industry average is 3.5%. AC
Speed compares unfavourably against other firms in the industry.
The Total Asset Turnover measures the efficiency of assets in producing sales. AC
Speed's total asset turnovers are 2.3, 2.27, and 2.21respectively. The trend for the 3
years is increasing from 2.21 to 2.3. The industry average is 1.9. AC Speed's ability to
generate $2.3 in sales from every dollar invested in its assets compares favourably
against other firms in the industry.
The Return on Assets measures the overall profitability of assets. It expresses net
income as a percentage of total assets. AC Speed's returns on assets are 3.9%, 3.8%,
and 8.3% respectively. The trend for the 3 years is decreasing from 8.3% to 3.9%. The
downward trend is consistent with the 3-year trend for the profit margin. The industry
average is 10.5%. AC Speed's ability to generate 3.9% return on its invested assets
compares poorly against the industry average of 10.5%.
The Return on Common Shareholders' Equity measures the overall profitability of
shareholder investment. It expresses net income as a percentage of common
shareholders' equity. AC Speed's returns on common shareholders' equity are 5.5%,
5.6%, and 12.5% respectively. The trend for the 3 years is decreasing from 12.5% to
5.5%. The industry average is 18.3%. AC Speed's ability to generate 5.5% return on
common shareholders' equity compares poorly against other firms in the industry.
The Earnings per Share measures net income per common share. The earnings per
shares for the 3 years are 2.31, 2.27, and 5.33. The trend for the 3 years is decreasing
from 5.33 to 2.31. The industry average is 3.05. AC Speed's ability to generate $2.31
per common share measures unfavourably against the industry average.
Market Prospects
The Price-earnings ratio reflects the stock market's expectations of AC Speed's future
risk and growth. Price-earnings ratios for the 3 years are 15.17, 14.98, and 5.82. The
trend is increasing from 5.82 to 15.17. An increase in price-earnings ratio indicates that
the stock market has a high expectation of growth. The industry average is 14.8. AC
Speed performs better than the industry average in this regard.
The Payout Ratio measures annual cash dividends per share as a percentage of the
stock market price. AC Speed's payout ratios for the 3 years are 0.8%, 0.7%, and 0.8%.
The trend for the 3 years is unchanged. The industry average is 15.0%. The payout
ratio of 0.8% compares unfavourably against the industry average of 15.0%.

Solvency
The Debt to Total Assets Ratio measures the creditor financing. AC Speed's debts to
total assets ratios for the 3 years are 24.2%, 26.0% and 27.3% respectively. The
industry average is 42.2%. The trend for the 3 years is improving from 27.3% to 24.2%.
A relatively low debt to total assets ratio reflects favourably on AC Speed's ability to
request additional bank loan. AC Speed's creditors are primarily concerned with AC
Speed's liquidity and debt ratio. The AC Speed's liquidity ratio indicates that it has no
issue with repaying short term debt, and the debt ratio indicates that AC Speed's
leveraged assets is about 24%, which is relatively lower than the industry average of
42%.
Summary
AC Speed's financial ratios analysis indicates that AC Speed is capable of repaying its
short term debt obligation and it is efficiently using its assets to generating income. The
profitability ratios indicate that AC Speed's ability to generate a profit is poor relatively to
the industry average. The profitability ratios 3-year trends are downward. AC Speed's
management is recommended to evaluate cost cutting measures and or sales
generating strategies to improve AC Speed's profitability. Overall, stock market's
expectation is reflected favourably in the price-earnings ratio. AC Speed's debt ratio is
relatively low compared to the industry average. This fact may assist AC Speed's quest
for additional bank loan.