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    Writing a Memo Analyzing the Performance of SAC for 2005/2006

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    Assist in writing a memo to your superior analyzing the performance of SAC for 2005 and 2006. This analysis should be based on the information found in the consolidated financial statements.

    Attached is the 2005 and 2006 financial information.

    Your memo should include the following financial ratios and a comparison of the ratios over the two-year period:

    current ratio
    debt-to-equity ratio
    inventory turnover (use ending inventory)
    accounts receivable turnover (use ending accounts receivable balance)
    gross margin percentage

    Show your calculations for each ratio and comment on SAC's performance for each ratio. Discuss other tools/methods that could be utilized to analyze the financial performance of a company.

    Scenario : (Background)
    The Sparklin Automotive Company (SAC) has been in business since 1930. It began business in the United States supplying spark plugs to automotive manufacturers (OEM, the original equipment market) and the automotive aftermarket.

    SAC has introduced a new spark plug manufacturing process in the United States that produces a higher quality spark plug guaranteed to last 100,000 miles. The introduction of this spark plug has been very successful in the United States.

    In addition to these types of projects, your responsibilities include creating and analyzing the monthly performance of each plant and consolidating the results into a set of financial statements footnoted with explanations.

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    Please find guidelines and ideas for Financial Performance of Sparklin Automotive Company (SAC) in the attached file.

    Running Head: MEMORANDUM

    Financial Performance of Sparklin Automotive Company (SAC)

    Memorandum

    To: ABC
    From: XYZ
    Date: February 22, 2011
    Sub.: Financial Performance of SAC
    Introduction
    Sparklin Automotive Company (SAC) is an automotive manufacturer that is established in the United States. The company has introduced a new spark plug manufacturing process in the U.S. market to increase quality in automotive products. There will be a discussion of financial ratios to analyze the financial performance of SAC.
    Financial Ratio Analysis of SAC
    Financial ratio analysis is an important tool in financial management to evaluate the performance of an organization in a particular time period (Brigham & Houston, 2007). The calculations of different financial ratios of SAC are as follow:
    Current Ratio: Current ratio is one of the most widely used financial ratios to analyze financial performance of the company in term of liquidity position (Brigham & Houston, 2007). It is helpful to measure the ability of a company to effectively and timely meet its short term obligation, when they are due. The calculation of current ratio of SAC is summarized in the following table.
    Formula 2005 2006
    Current ratio = Current assets ÷ Current liabilities 1.47 1.40
    Current assets $72300 $67350
    Current liabilities $49000 $48000
    (All figures in thousands)

    The above table shows that the current ratio of SAC has decreased in 2006 from 1.47 to 1.40, because of decline in currents assets. The current ratio of SAC is greater than one in both the years that shows that the company has sufficient current assets to meet its current obligation (Brigham & Houston, 2007). At the same time, the decline in current ratio in the year 2006 can affect the company's ability to meet its current financial obligation.

    Debt to Equity Ratio: Debt to equity ratio reveals the relationship between internal and external sources of funds of a company. It is an important financial tool that is used to indicate the relative proportion of shareholders' equity and debt to finance company's assets. It is one of the most commonly used tools to assess financial leverage of the company (Albrecht, Stice & Stice, 2007). The calculation of debt to equity ratio of SAC is as follows:
    Formula 2005 2006
    Debt to equity ratio = Total debt ÷ Total equity 0.45 0.44
    Total debt $49100 $48150
    Total equity $109200 $109200
    (All figures in thousands)

    Assumption: Total liabilities of SAC are taken as the total debt to determine debt to equity ratio of the company.

    The above table explains that the debt to ...

    Solution Summary

    The solution writes a memo analyzing the performance of SAC for 2005/2006.

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