SAC This memo will discuss the financial condition of Sparklin Automotive Company (SAC) for the years 2005-2006. Sparklin produces spark plugs for the original equipment market (OEM) for automotive manufacturers, as well as for the automotive aftermarket. The company has recently introduced a new spark plug that offers superior performance. The content of this memo will include both a ratio analysis and other forms of financial analysis. At the conclusion of this memo will be recommendations for the company to improve its financial performance. These recommendations will be based on the financial analysis contained in the memo.

Financial analysis involves analyzing a company's financial statements to determine the health of the company. There are a number of different types of analysis, including ratio analysis and trend analysis. The former involves calculating financial ratios in order to better understand the firm's financial performance. Ratio analysis tends to use the same sets of ratios for each company in order to allow for better comparison between companies, but also within the same company over time. There are a number of different types of ratios that are calculated, each relating to a different component of financial performance. These include liquidity ratios, profitability ratios, debt ratios, operating performance ratios and investment valuation ratios (Loth, 2011).

Part III.

The three main liquidity ratios are the current ratio, the quick ratio and the cash ratio. The current ratio is the current assets / current liabilities. The quick ratio is (current assets -- inventories) / current liabilities and the cash ratio is cash / current liabilities. The current ratio for SAC is 1.40, compared with 1.47 in 2005. The quick ratio in 2006 is 0.64 and in 2005 it was 0.95. The cash ratio in 2006 is 0.45, compared with 0.78 in 2005.

The three main profitability ratios are the gross margin, the operating margin and the net margin. The gross margin is calculated as the gross income / revenue. The operating...

The net margin is calculated as the net income / revenue. The gross margin for 2006 was 40.7%, compared to 49% in 2005. The operating margin was 37.9%, compared to 44.2%. The net margin in 2006 was 17.6%, compared to 20.4%.
The debt ratios to be studied are the debt ratio and the debt-to-equity ratio. The debt ratio is the debt / assets. The debt/equity ratio is self-evident. The debt ratio for 2006 is 30.6%, compared to 31% in 2005. The debt-to-equity ratio in 2006 was 44%, compared to 44.9% in 2005.

The three main operating performance indicators are the accounts receivable turnover, the inventory turnover and the asset turnover. The accounts receivable turnover is calculated as the net income / accounts receivable. Inventory turnover is calculated as the cost of goods sold / inventory. Asset turnover is calculated as the net income / total assets. The A/R turnover for SAC in 2006 was 3.2 times, compared with 3.7 times in 2005. Inventory turnover was 2.7 times in 2006, compared with 3.1 times in 2005. Total asset turnover was 0.18 times in 2006, compared with 0.2 times in 2005.

Part IV.

While there has only been a slight deterioration in the current ratio in 2006, the quick and cash ratios have declined sharply. This is the result of a dramatic increase in inventories, which has come at the expense of cash. This could potentially indicate that the company has seen its sales slow, affecting the cash conversion cycle and leaving more of its assets in inventories. That sales increased at a slower rate than the cost of goods sold would seem to support this contention.

The profitability ratios indicate that the company's financial performance has deteriorated in the past year. Each ratio decline significantly. The biggest decline was in the gross margin, which in part can be attributed to the buildup in inventory that the company experienced. The company actually cut its other expense categories. There was a substantial decline of 63% in selling…