Franklin Manufacturing Company

The table below shows the key ratios for Franklin manufacturing computed between year 2020
and 2022

Industry Average of Key Ratios

Industry
averages 2020 2021 2022

Current Ratio

2.30:1

1.18421
1
1.53809
5
1.82846
2

Acid Test Ratio (Quick

Ratio) 1.20:1

0.44736
8
0.10952
4
0.09769
2

Inventory turnover Ratio

4.85 Times

0.44642
9
0.17866
7 0.208
Debt to Equity Ratio 35% 37.25% 34.26% 22.50%
Asset turnover 20.54% 18.23% 21.20%
Based on the above results, the company should expand. The current ratios indicate that
though the company is not at par with its peers, it has no risk with respect to acquiring debt. The
current ratio compares a company’s current assets and current liabilities and the company’s ablity
to meet short term obligations due in a year (Ar, 2019). The company improved from 2020 to
2022, moving from a 1.1:1 ratio to a 1.8:1 ratio. The debt-to-equity ratio also shows the company
is a strong performer. The debt-to-equity ratio shows was 37.25% in 2020 compared to 22.50%
in 2022, which shows that the company has reduced its debt.
An additional liability for funding is advantageous at this point for several reasons. First,
the company has no significant risk as its debt-to-equity ratio is better than the industry average,
and the current ratio is close to the industry average. The company’s income statement also
shows that the company could have a low default risk. Franklin Manufacturing has increased its
revenues by 161% and its profits by 496% between 2020 and 2022. This indicates that it operates
in a growing industry, and additional liability for funding could help it improve its performance.

3
Considering the inventory turnover ratio, the company should expand. The ratio shows
that the company has struggled to match its competitors. The company’s inventory turnover has
moved from 0.4 times in 2020 to 0.2 times in 2022. This phenomenon is also explained by the
company’s high inventory at the end of the three financial years analyzed. It shows that the
company has some challenges moving the stock and could incur costs associated with unmoving
stock. The additional funding could be directed towards marketing and advertising to ensure that
the company improves its revenues and net income to allow it to repay its debt and maintain
healthy profit levels.
The areas of improvement I would recommend are improving manufacturing efficiency.
The low inventory turnover means the company is slow to convert its inventory into cash. There
are several reasons why this could be costly to Franklin manufacturing. For example, the
company could be keeping excess stock, which could be inventory handling costs. In addition,
lower inventory turnover increases the risk of losses caused by price increases or changes in
demand due to consumer preferences and the cost of storing and maintaining the inventory. A
high inventory turnover ratio signifies better liquidity (Charles & Uford, 2023). Companies
ideally want to move their stock faster to perform better than their competitors. Marketing and
advertising could help move some of the inventory to increase the inventory turnover ratio.
The company also needs to improve its liquidity. The quick ratio assesses the company’s
ability to meet short-term liquidity needs. Franklin Company’s liquidity has reduced from 0.44 1
in 2020 to 0.09:1 in 2022. The company should, therefore, consider a short cash conversion cycle
to improving its liquidity (Hayes, 2020). The company could experience challenges meeting
short-term liquidity needs, which could hamper its operations. It could experience delays in
paying suppliers, disrupting the manufacturing schedule.

4
In summary, the expansion decision can help the company achieve better performance.
Addressing the low inventory turnover and the low liquidity can also help balance its
performance. The company has a strong balance sheet and a financial statement that shows its
potential and the benefits it can gain from the expansion decision.

5

References

Ar, S. (2019). Accounting Ratios: A Guide o Financial Ratio Analysis – QuickBooks.
Quickbooks.intuit.com.
https://quickbooks.intuit.com/in/resources/accounting/accounting-ratios/
Charles, I. I., & Uford, I. C. (2023). Comparative Analysis and Evaluation of Business and
Financial Performance of Amazon. Com: A Three-Year Period Critical Review of
Exceptional Success. European Journal of Business, Economics and Accountancy, 11(2),
69-92.
Hayes, A. (2022, June 15). Cash Conversion Cycle – CCC. Investopedia.
https://www.investopedia.com/terms/c/cashconversioncycle.asp