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Danhart Plumbing is a small manufacturer of plumbing supplies located in Toronto, Canada. It is in a highly competitive industry and therefore

must maintain an aggressive marketing posture to survive.

Danhart Plumbing is a small manufacturer of plumbing supplies located in Toronto, Canada. It is in a highly competitive industry and therefore

must maintain an aggressive marketing posture to survive.

The firm’s board of directors will elect a new president, Robert Denhart. Robert Denhart is concerned about the future of Denhart Plumbing.

Although sales rose slightly between 1988 and 1989, after tax profits declined substantially. He also wants to be able to explain to the board

why profits have declined. He focused on the number of shares outstanding, dividend payout and growth and ratio analysis of Danhart

plumbing.

The firm’s board of directors will elect a new president, Robert Denhart. Robert Denhart is concerned about the future of Denhart Plumbing.

Although sales rose slightly between 1988 and 1989, after tax profits declined substantially. He also wants to be able to explain to the board

why profits have declined. He focused on the number of shares outstanding, dividend payout and growth and ratio analysis of Danhart

plumbing.

• Robert learned that the firm’s stock sold for $18 a share at the end of 1988 and $22 a share at the end of 1989. The accounting department had omitted the number of shares outstanding and the 1989 dividends from the working papers provided to him. We have to find out the amount of dividend given to stockholder in 1989 as well as the number of shares outstanding. Besides we need to analyze the financial condition of Danhart plumbing. Ratio analysis will indicate whether the Danhart Plumbing is a strong firm in this industry as well as possible problem areas.

• What is the number of shares outstanding? How much did Denhart Plumbing pay in cash dividends in 1989?

• Is Danhart Plumbing is a strong firm in this industry?

• Do any of its Ratios indicate possible problem areas?

• Do the changes in ratios from 1988 to 1989 offer evidence that the firm is growing stronger or weaker? Which Ratios give this information?

• Number of shares outstanding:• Stocks can be two types- common stock and preffered stock. Danhart plumbing company includes only common stock. In it’s balance sheet the amount of common stock($1 par) is $10000. So the number of shares outstanding will be 10000.• Dividends paid in 1989:• In 1989 Danhart plumbing company’s net income was $10560.Generally a firm produces its cashflows from its operation. After meeting all its financial obligation it has earnings available to shareholders, which is called retained earnings.• Now this retained earnings can be distributed to shareholders or it can be reinvested in the potential projects .if it is distributed to shareholder then it is called dividend. • In 1989 Danhart plumbing company’s retained earnings increased from $10957 to $15780.• Dividends paid in 1989 is= 10560-4823

=$5737

Danhart plumbing (Ratio Analysis)

1989 1988

current ratio 1.48 2.38

Acid test 0.63 1.21

Accounts receivable turnover 16.56 28.00

Inventory turnover 5.18 6.80

profit margin 14.17% 16.41%

Gross profit margin 41.33% 39.72%

Asset turnover 1.48 1.79

Return on investment 21.04% 29.34%

Return on Equity 36.69% 47.96%

Times interest earned 18.45 16.19

price-earnings ratio 20.83 15.67

Debt equity ratio 0.74 0.63

Dividend payout 54.33% 39.16%

Dividend yield 2.61% 2.50%

Earnings per share 1.056 1.149

Dividend per share 0.5737 0.45

Interpretation: Plumbing-supply industry Averages for current ratio is 1.4. In 1989 current ratio was 1.48 and in 1988 it is 2.38 Both are higher than Plumbing-supply industry Average. If we compare the time series than current ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for current ratio is 1.4. In 1989 current ratio was 1.48 and in 1988 it is 2.38 Both are higher than Plumbing-supply industry Average. If we compare the time series than current ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for acid test ratio is 0.9. In 1989 acid test ratio was 0.63and in 1988 it is 1.21. In 1988 acid test ratio is higher than Plumbing-supply industry Average. But in 1989 it is lower than averages which means that the company has liquidity crisis. If we compare the time series than acid test ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for acid test ratio is 0.9. In 1989 acid test ratio was 0.63and in 1988 it is 1.21. In 1988 acid test ratio is higher than Plumbing-supply industry Average. But in 1989 it is lower than averages which means that the company has liquidity crisis. If we compare the time series than acid test ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for Accounts Receivable Turnover Ratio is 8 times. In 1989 Accounts Receivable Turnover Ratio was 16.56 times and in 1988 it was 28 times Both are higher than Plumbing-supply industry Average. If we compare the time series than current ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for Accounts Receivable Turnover Ratio is 8 times. In 1989 Accounts Receivable Turnover Ratio was 16.56 times and in 1988 it was 28 times Both are higher than Plumbing-supply industry Average. If we compare the time series than current ratio in 1989 is lower than1988.

Interpretation: Plumbing-supply industry Averages for Inventory Turnover Ratio is 5 times. In 1989 Inventory Turnover Ratio was 5.18 times and in 1988 it was 6.80 times Both are higher than Plumbing-supply industry Average. If we compare the time series than Inventory Turnover Ratio in 1989 is lower than1988 which indicates inefficiency in controlling inventory levels.

Interpretation: Plumbing-supply industry Averages for Inventory Turnover Ratio is 5 times. In 1989 Inventory Turnover Ratio was 5.18 times and in 1988 it was 6.80 times Both are higher than Plumbing-supply industry Average. If we compare the time series than Inventory Turnover Ratio in 1989 is lower than1988 which indicates inefficiency in controlling inventory levels.

Interpretation: Plumbing-supply industry Averages for Profit Margin Ratio is 16%.In 1989 Profit Margin Ratio was 14.17% and in 1988 it was 16.41%. In 1988 Profit Margin Ratio is higher than Plumbing-supply industry Average and in 1989 profit margin reduced. If we compare the time series than Inventory Turnover Ratio in 1989 is lower than1988 which indicates net profitability reduced.

Interpretation: Plumbing-supply industry Averages for Profit Margin Ratio is 16%.In 1989 Profit Margin Ratio was 14.17% and in 1988 it was 16.41%. In 1988 Profit Margin Ratio is higher than Plumbing-supply industry Average and in 1989 profit margin reduced. If we compare the time series than Inventory Turnover Ratio in 1989 is lower than1988 which indicates net profitability reduced.

Interpretation: Plumbing-supply industry Averages for Gross Profit Margin Ratio is 30%.In 1989 Gross Profit Margin Ratio was 41.33% and in 1988 it was 39.72%. In 1989 Gross Profit Margin Ratio is higher than Plumbing-supply industry Average and in 1988 Gross Profit Margin reduced than average. If we compare the time series than Gross Profit Margin Ratio in 1989 is higher than1988 which indicates gross profitability increased.

Interpretation: Plumbing-supply industry Averages for Asset Turnover Ratio is 1.3 times. In 1989 Asset Turnover Ratio was 1.48 times and in 1988 it was 1.79 times In 1989 & 1988 Asset Turnover Ratio is higher than Plumbing-supply industry Average. If we compare the time series than Asset Turnover Ratio in 1989 is lower than1988 which indicates the company is not using its assets optimally.

Interpretation: Plumbing-supply industry Averages for Asset Turnover Ratio is 1.3 times. In 1989 Asset Turnover Ratio was 1.48 times and in 1988 it was 1.79 times In 1989 & 1988 Asset Turnover Ratio is higher than Plumbing-supply industry Average. If we compare the time series than Asset Turnover Ratio in 1989 is lower than1988 which indicates the company is not using its assets optimally.

Interpretation: Plumbing-supply industry Averages for Return on investment Ratio is 25%.In 1989 Return on investment Ratio was 21.04% and in 1988 it was 29.34% .In 1988 Return on investment Ratio is higher than Plumbing-supply industry Average but lower in 1989.If we compare the time series than Return on investment Ratio in 1989 is lower than1988 which indicates the inefficiency of investment.

Interpretation: Plumbing-supply industry Averages for Return on investment Ratio is 25%.In 1989 Return on investment Ratio was 21.04% and in 1988 it was 29.34% .In 1988 Return on investment Ratio is higher than Plumbing-supply industry Average but lower in 1989.If we compare the time series than Return on investment Ratio in 1989 is lower than1988 which indicates the inefficiency of investment.

Interpretation: Plumbing-supply industry Averages for Return on Equity Ratio is 10%.In 1989 Return on Equity Ratio was 36.69% and in 1988 it was 47.96% .In 1988 Return on Equity Ratio is higher than Plumbing-supply industry Average but lower in 1989.If we compare the time series than Return on Equity Ratio in 1989 is lower than1988 which indicates company is inefficient in generating income on new investment.

Interpretation: Plumbing-supply industry Averages for Return on Equity Ratio is 10%.In 1989 Return on Equity Ratio was 36.69% and in 1988 it was 47.96% .In 1988 Return on Equity Ratio is higher than Plumbing-supply industry Average but lower in 1989.If we compare the time series than Return on Equity Ratio in 1989 is lower than1988 which indicates company is inefficient in generating income on new investment.

Interpretation: Plumbing-supply industry Averages for Times Interest Earned Ratio is 12.In 1989 Times Interest Earned Ratio was 18.45 and in 1988 it was 16.19. In 1989 and 1988 Times Interest Earned Ratio is higher than Plumbing-supply industry Average.If we compare the time series than Times Interest Earned ratio in 1989 is higher than1988 which indicates the firm has just enough to pay off its interest expense.

Interpretation: Plumbing-supply industry Averages for Times Interest Earned Ratio is 12.In 1989 Times Interest Earned Ratio was 18.45 and in 1988 it was 16.19. In 1989 and 1988 Times Interest Earned Ratio is higher than Plumbing-supply industry Average.If we compare the time series than Times Interest Earned ratio in 1989 is higher than1988 which indicates the firm has just enough to pay off its interest expense.

Interpretation: Plumbing-supply industry Averages for Price/Earnings Ratio is 14.In 1989 Price/Earnings Ratio was 20.83 and in 1988 it was 15.67. In 1989 and 1988 Price/Earnings Ratio is higher than Plumbing-supply industry Average. If we compare the time series than Price/Earnings Ratio in 1989 is higher than1988 which indicates the current stock price is increasing

Interpretation: Plumbing-supply industry Averages for Price/Earnings Ratio is 14.In 1989 Price/Earnings Ratio was 20.83 and in 1988 it was 15.67. In 1989 and 1988 Price/Earnings Ratio is higher than Plumbing-supply industry Average. If we compare the time series than Price/Earnings Ratio in 1989 is higher than1988 which indicates the current stock price is increasing

Interpretation: Plumbing-supply industry Averages for Debt-to-Equity Ratio is 0.55.In 1989 Debt-to-Equity Ratio was 0.74 and in 1988 it was 0.63. In 1989 and 1988 Debt-to-Equity Ratio is higher than Plumbing-supply industry Average which means the firm is depending on more debt. If we compare the time series than Debt-to-Equity Ratio in 1989 is higher than1988 which indicates the firms risk is high.

Interpretation: Plumbing-supply industry Averages for Debt-to-Equity Ratio is 0.55.In 1989 Debt-to-Equity Ratio was 0.74 and in 1988 it was 0.63. In 1989 and 1988 Debt-to-Equity Ratio is higher than Plumbing-supply industry Average which means the firm is depending on more debt. If we compare the time series than Debt-to-Equity Ratio in 1989 is higher than1988 which indicates the firms risk is high.

Interpretation: Dividend payout ratio judges the amount of dividend in relation to the company's earnings for the period. Plumbing-supply industry Averages for Dividend Payout Ratio is 25%.In 1989 Dividend Payout Ratio was 54.33% and in 1988 it was 39.16%. In 1989 and 1988 Dividend Payout Ratio is higher than Plumbing-supply industry Average which means the firm is paying more dividend. If we compare the time series than Dividend Payout Ratio in 1989 is higher than1988 which indicates the firm can reinvest less amount in other project.

Interpretation: Dividend payout ratio judges the amount of dividend in relation to the company's earnings for the period. Plumbing-supply industry Averages for Dividend Payout Ratio is 25%.In 1989 Dividend Payout Ratio was 54.33% and in 1988 it was 39.16%. In 1989 and 1988 Dividend Payout Ratio is higher than Plumbing-supply industry Average which means the firm is paying more dividend. If we compare the time series than Dividend Payout Ratio in 1989 is higher than1988 which indicates the firm can reinvest less amount in other project.

Interpretation: Dividend yield ratio provides a comparison of amount of dividend in relation to investment needed to purchase its share. Plumbing-supply industry Averages for Dividend Yield Ratio is 3%.In 1989 Dividend Yield Ratio was 2.61% and in 1988 it was 2.50%. In 1989 and 1988 Dividend Yield Ratio is lower than Plumbing-supply industry Average which means the firm’s growth rate is lower than averaged. If we compare the time series than Dividend Yield Ratio in 1989 is higher than1988 which indicates the firms growth rate is gradually increasing.

Interpretation: Dividend yield ratio provides a comparison of amount of dividend in relation to investment needed to purchase its share. Plumbing-supply industry Averages for Dividend Yield Ratio is 3%.In 1989 Dividend Yield Ratio was 2.61% and in 1988 it was 2.50%. In 1989 and 1988 Dividend Yield Ratio is lower than Plumbing-supply industry Average which means the firm’s growth rate is lower than averaged. If we compare the time series than Dividend Yield Ratio in 1989 is higher than1988 which indicates the firms growth rate is gradually increasing.

After calculating the ratio analysis we found current ratio, Accounts receivable turnover, Inventory turnover, Gross profit margin, Asset turnover, Return on Equity, Times interest earned, price-earnings ratio, Debt equity ratio, Dividend payout are higher than Plumbing-supply industry Averages for financial ratio in 1989.But these ratio Acid test, profit margin, Return on investment, Dividend yield are lower than Plumbing-supply industry Averages for financial ratio. Overall Danhart Plumbing is a strong firm in this industry.

• Here are some possible problem area that are identified from ratio analysis:

Ratio 1989 1988

Acid test 0.63 1.21

Profit margin 14.17%16.41

%

Return on investment 21.04%29.34

%

Debt equity ratio 0.74 0.63

Dividend payout 54.33%39.16

%

Dividend yield 2.61% 2.50%

• When we are considering the year of 1989 the firm’s have liquidity crisis. Profit margin is lower than Plumbing-supply industry Averages for financial ratio although the gross profit margin increased. Return on investment is also lower than industry averages. Moreover the firm is more reliable on debt rather than equity. The dividend payout ratio is higher so the firm can reinvest its net income less in other sector. Last of all dividend yield ratio is lower than expectation and it has an effect on the current stock price.

Possible problem areas:

• These are the changes in ratios from 1988 to 1989 offer evidence that the firm is growing weaker. When we are comparing the ratio of 1989 with the ratio of 1988 we found the firm have liquidity crisis. In 1989 acid test ratio decreased 1.21 to 0.63. Accounts receivable turnover is also decreased 28 times to 16.56 times. Inventory turnover is also decreased 6.80 to 5.18 times. profit margin is also decreased 16.41% to 14.17%.Asset turnover ratio, Return on investment, Return on Equity decreased. Debt equity ratio increased which means the firm is more reliable to debt.

• The dividend payout ratio is higher so the firm can reinvest its net income less in other sector.

4. The firm is growing weaker:

These Ratios give this information that the firm is growing weaker

Danhart plumbing (Ratio Analysis)

1989 1988

current ratio 1.48 2.38

Acid test 0.63 1.21

Accounts receivable turnover 16.56 28.00

Inventory turnover 5.18 6.80

profit margin 14.17% 16.41%

Asset turnover 1.48 1.79

Return on investment 21.04% 29.34%

Return on Equity 36.69% 47.96%

Debt equity ratio 0.74 0.63

Dividend payout 54.33% 39.16%

 STRENGTHS

Their sales are slightly increasingSkilled labor force

Stock price is increasing year to yearWEAKNESSES

Danhart plumbing is a small manufacturer of plumbing suppliesTheir net operating income is gradually decreasing.

OPPORTUNITIESDividend policy

Dividend expectation of stockholderTHREATS

It is in a highly competitive industryIt must maintain an aggressive marketing posture to survive.

 STRENGTHS

Their sales are slightly increasingSkilled labor force

Stock price is increasing year to yearWEAKNESSES

Danhart plumbing is a small manufacturer of plumbing suppliesTheir net operating income is gradually decreasing.

OPPORTUNITIESDividend policy

Dividend expectation of stockholderTHREATS

It is in a highly competitive industryIt must maintain an aggressive marketing posture to survive.

Findings:After calculating the ratio analysis we found current ratio, Accounts receivable turnover, Inventory turnover, Gross profit margin, Asset turnover, Return on

Equity, Times interest earned, price-earnings ratio, Debt equity ratio, Dividend payout are higher than Plumbing-supply industry Averages for financial ratio in 1989.But these ratio Acid test, profit margin, Return on investment, Dividend

yield are lower than Plumbing-supply industry Averages for financial ratio. Overall Danhart Plumbing is a strong firm in this industry.

Although the firm is strong in the industry gradually the firm is growing weaker at the time of comparing the financial condition of 1989 to 1988.

• Higher the current ratio better it is but there is a limit to this..• A quick ratio of more than one indicates that the most liquid

assets of a business exceed its total debts. • Accounts receivable turnover measures the efficiency of a

business in collecting its credit sales. • Inventory turnover ratio is used to measure the inventory

management efficiency of a business. • A lower asset turnover ratio tells that the company is not

using its assets optimally.• Return on equity is an important measure of the profitability

of a company.

Interpretation:Interpretation:

Recommendation:• The company should focus on the general and administrative expense because it reduces the net income of the company.

• The firm should know the expectation of the shareholder as their dividend payout ratio is high

• The firm should increase the portion of retained earnings.

Conclusion:The firm’s stock price is gradually increasing $18 to $22.But the net operating income is gradually decreasing. As the firm is growing weaker the new president should change the dividend policy. The firm should try to control their cost. The firm is relying more on debt which is highly risky.