Question

3. The following ratios and inventory levels are for the Sterling Company for each of the past 3 years:

Sterling Company Ratio Analysis
	Actual	Actual	Actual	Industry Average	TS: Time-series
Ratio	2007	2008	2009	2009	CS: 2009 vs. Industry Average
Current ratio	1.40	1.55	1.67	1.85	TS:
					CS:
Quick ratio	1.00	0.92	0.88	1.05	TS:
					CS:
Inventory turnover	9.52	9.21	7.89	8.60	TS:
					CS:
Average collection					TS:
 period	45.6 days	36.9 days	29.2 days	35.5 days	CS:
Average payment					TS:
 period	59.3 days	61.6 days	53.0 days	46.4 days	CS:
Total asset turnover	0.74	0.80	0.83	0.74	TS:
					CS:
Debt ratio	0.20	0.20	0.35	0.30	TS:
					CS:
Times interest earned	8.2	7.3	6.5	8.0	TS:
					CS:
Fixed payment					TS:
 coverage ratio	4.5	4.2	2.3	4.2	CS:
Gross profit margin	0.30	0.27	0.25	0.25	TS:
					CS:
Operating profit					TS:
 margin	0.12	0.12	0.13	0.10	CS:
Net profit margin	0.062	0.062	0.066	0.053	TS:
					CS:
Return on total					TS:
 assets	0.045	0.050	0.055	0.040	CS:
Return on common					TS:
 Equity	0.061	0.067	0.085	0.066	CS:
Earnings per share					TS:
 (EPS)	$1.75	$2.20	$3.05	$1.50	CS:
Price/earnings					TS:
 (P/E)	12.0	10.5	13.0	11.2	CS:
Market/book ratio					TS:
 (M/B)	1.20	1.05	1.01	1.10	CS:

a) In the last column above, indicate the following:

Under TS: indicate whether the performance improved or deteriorated over the years.

Under CS: indicate how the company performed overall against the industry average (poor, fair, better).

b) Analyze Sterling’s overall financial situation from both a cross-sectional and a time-series viewpoint for the following areas:

- Liquidity performance

- Activity performance

- Debt performance

- Profitability performance

- Market performance