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ElectroStar Corporation is a manufacturer of electronic components with total assets of $20,000,000

Accounting

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ElectroStar Corporation is a manufacturer of electronic components with total assets of $20,000,000. Selected financial ratios for ElectroStar and the industry averages for firms of similar size are as follows:

                                                                              ElectroStar                      

                                                                                                                                    Industry

2012                2011                2010                Average

Current ratio . . . . . . . . . . . . . . 2.61                 2.32                 2.09                 2.28

Acid-test ratio . . . . . . . . . . . . .  1.21                 1.12                 1.15                 1.22

Inventory turnover . . . . . . . . .   2.02                 2.18                 2.40                 3.50

Return on equity . . . . . . . . . . .  0.17                 0.15                 0.14                 0.11

Debt-equity ratio . . . . . . . . . . .  1.44                 1.37                 1.41                 0.95

 

ElectroStar is under review by several entities whose interests vary, and the company’s financial ratios are part of the data being considered. Each of the following parties must recommend an action based on its evaluation of ElectroStar’s financial position. ElectroStar has given the requested informationto each party on a confidential basis.

 

• MidCoastal Bank. The bank is processing ElectroStar’s application for a new five-year note. MidCoastal has been ElectroStar’s banker for several years, but must evaluate the company’s financial position for each major transaction.

 

• Ozawa Company. Ozawa is a new supplier to ElectroStar 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, Drucker & Denon must decide if it will include ElectroStar in a new mutual fund being established for sale to Drucker & Denon’s clients.

 

• Working Capital Management Committee. This is a committee of ElectroStar’s 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 the given ratios.

 

2. For each of the four entities described above, identify two financial ratios from those ratios presented that would be most valuable as a basis for its decision regarding ElectroStar.

 

3. Comment the performance of ElectroStar based on the five ratios given above.