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

Question

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Avantronics 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 Avantronics' financial position.
 Mid Coastal Bank.The bank is processing Avantronic's application for the new five-year term note.MidCoastal has been Avantronics' banker for several years,but must re-evaluate the company's financial position for each major transaction.
Ozawa Company.Ozawa is a new supplier to Avantronics,and must decide on the appropriate credit terms to extend to the company.
 Drucker & Denon.A brokerage firm specializing in the stock of electronics firms that are sold over-the- counter,Drucker & Denon must decide if it will include Avantronics in a new fund being established for sale to Drucker & Denon's clients.
Working Capital Management Committee.This is a committee of Avantronics' 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.Required:(1)Describe the analytical use of each of the four ratios presented above.(2)For each of the four entities described above,identify one or two financial ratios,from those ratios presented,that would be most valuable as a basis for its decision regarding Avantronics.(3)Discuss what the financial ratios presented in the question reveal about Avantronics.Support your answer by citing specific ratio levels and trends as well as the interrelationships between these ratios.
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 Feedback: (1)* The current ratio measures overall short-term liquidity and is an indicator of the short-term debt-paying ability of the firm.* The quick ratio also is a measure of short-term liquidity.However,it is a measure of more immediate liquidity that the current ratio and is an indicator of a firm's ability to pay all of its immediate debts from cash or near cash assets.The quick ratio is also an indicator of the degree of inventories in its current assets when compared to the current ratio.* Inventory turnover is an indicator of the number of times a firm sells its average inventory level during the year.A low inventory turnover may indicate excessive inventory accumulation or obsolete inventory * Return on equity is a profitability ratio.It measures the return on stockholders' investment and is used to evaluated the company's success in generating income for the benefit of its stockholders Avantronics appears to have a strong current/liquidity position as evidenced by the current and quick ratios that have been improving over the three-year period and that have exceeded the general guidelines.In addition,the current ratio is greater than the industry average and the quick ratio is just slightly below.However,the increase in the current ratio could be due to an increase in inventory levels.This fact is confirmed by the deteriorating inventory turnover ratio that is also below the industry average.Overstock or obsolete inventory conditions may exist.Avantronics' profitability is good as indicated by the relatively high return on equity -- greater than the industry average.

Business Analysis Avantronics Is a Manufacturer of Electronic Components and Accessories