Are manufacturers financially in good stead to weather hard times? To find out, we took a look at the liquidity and debt ratios of the Assembly Top 50.
October was an apt month in which to receive the quarterly statement from my retirement investments. The value of my shares had fallen like the leaves from the trees in my back yard, and I looked upon the bottom line with a horror reserved for the scariest Halloween movies. Thankfully, I won’t be retiring any time soon.
The results also got me thinking about how manufacturers are faring and if they’re in good stead to weather hard times. So, I dusted off my collection of annual reports for 2007 and got to work in Excel.
I’m no financial analyst, but the first thing I looked at were manufacturers’ liquidity and debt ratios: the current ratio, the quick ratio, the debt-to-assets ratio and the debt-to-equity ratio.
A company’s current ratio is the mathematical relationship of its current assets to its current liabilities. In other words, the current ratio indicates how well a company can pay its current liabilities with its current assets. The current ratio is calculated by dividing the total current assets by the total current liabilities.
A current ratio of more than 1.0 indicates that a company has sufficient current assets to cover its current liabilities. In contrast, a current ratio of less than 1.0 indicates that a company does not have enough current assets to cover current liabilities. Most analysts expect a company to have a current ratio of at least 1.5, but the figure varies by industry.
Some 42 of the Assembly Top 50 have a current ratio greater than 1.0, though only five have a ratio greater than 2.0. The average current ratio for manufacturing companies is 1.17, and more than half Assembly Top 50 (28, to be exact) beat that.
A variation of the current ratio, the quick ratio focuses solely on the amount of current assets that can be quickly converted to cash. The assets used to calculate the quick ratio-cash and accounts receivable-are called quick assets because they are immediately available to cover a company’s liabilities.
The quick ratio is calculated by dividing quick assets by current liabilities. Most analysts use a quick ratio of 1.0 as an indication of a healthy company. A ratio of less than 1.0 indicates that a company doesn’t have enough ready assets to cover current liabilities. Although only eight members of the Assembly Top 50 have a quick ratio of 1.0 or better, the average quick ratio for all manufacturing companies is only 0.88.
The debt-to-assets ratio is used to determine what percentage of a business’s assets has been funded through debt, as opposed to the percentage that has been funded by owner’s equity. It’s calculated by dividing total liabilities by total assets.
For most industries, a debt-to-assets ratio of 50 percent or less is considered good. A higher ratio may indicate that a company is overleveraged and may have problems paying off its debt. Although only 10 of the Assembly Top 50 have a debt-to-assets ratio under 50 percent, just two-GM and Delphi-have a ratio over 1.
A better indicator of debt is the debt-to-equity ratio. This is the amount of debt a company is carrying as a percentage of its shareholders’ equity. As a rule of thumb, industrial companies should maintain a debt-to-equity ratio between 0.5 and 1.5, and 19 of the Assembly Top 50 have ratios that meet that standard. Capital-intensive operations, like car manufacturing, can have a debt-to-equity ratio over 2.0. Computer manufacturers, on the other hand, might have a debt-to-equity ratio under 0.5.
Here’s how the entire Assembly Top 50 stack up:
The Assembly Top 50: Liquidity & Debt Ratios