Financial analysis of the paper industry

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FINANCIAL ANALYSIS of THE PAPER INDUSTRY

MOPEAT ROBERTSON HILL

S u b m itte d i n p a r t i a l f u l f i l l m e n t o f th e r e q u ir e m e n ts f o r th e d e g re e o f MASTER 01 BUSINESS ALMINISTRATION

F a c u lty o f G ra d u a te S tu d ie s THE UNIVERSITY OF WESTERN ONTARIO 1950

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UMI Number: EC54031

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A pproved f o r th e S ch o o l o f BUSINESS ADMINI STRAP ION

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TABLE OF CONTENTS

FOREWORD ......................................................................................................................................

1

ABSTRACT ......................................................................................................................................

2

CHAPTER I

M ethod o f p ro c e d u re and s o u rc e o f d a t a .................................................... 4

II

D e f i n i t i o n o f te rm s u s e d ..................................................................................... 6

III

D e f i n i t i o n o f r a t i o s u s e d ............................................

I?

.8

M ech an ical p r o c e d u r e ............................................................................................ 11

V

A n a ly s is o f r a t i o s ............................................................................................ 16 C h a rt # 1 .

R a t io s , f o r ea c h y e a r and t h e i r a v e ra g e , a s com puted from co m p o site a n n u a l b a la n c e s h e e t s .

C h a rt # 2 .

R a t io s , f o r eac h y e a r and t h e i r a v e ra g e , a s com puted from e a c h com pany's a n n u a l b a la n c e s h e e t s .

C h a rt # 3 .

R a t io s , f o r eac h company and t h e i r a v e r a g e , a s com puted from each com pany's co m p o site 11 y e a r b a la n c e s h e e t s .

C h a rt # 4 .

Summary o f th e t h r e e i n d u s t r y a v e ra g e r a t i o s , and o v e r a l l i n d u s t r y a v e ra g e .

C h a rt # 5 . VI

H igh - Low c h a r t o f 1948 and o f 1938

C o n c l u s i o n ........................................................................

APPENDIX A

C h a r ts #6 - 16 B a la n c e S h e e t D ata f o r each company and c o m p o site a n n u a l B a la n c e S h e e t f o r I n d u s t r y , b y y e a r s 1948 - 1938.

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31

m B

C h a rt #17 - 1 - 3 - 3 D e ta i l o f I n d u s t r y R a tio c o m p u ta tio n s , a s c a l c u l a t e d from co m p o site a n n u a l B a la n c e S h e e ts

C

C h a r ts #18 - 28 R a tio s f o r e a c h Company and th e a v e r a g e s , b y y e a r s 1948 - 19 38.

D

C h a r ts #29 - 33 R a tio s f o r a l l th e y e a r s and th e a v e r a g e s , by C om panies.

1

C h a r ts #34 - 38 B a la n c e S h e e t d a ta f o r eac h y e a r and co m p o site 11 y e a r B a la n c e S h e e t, b y C om panies.

F

C h a rt #39 D e t a i l o f Company R a tio C o m p u tatio n s, a s c a l c u l a t e d from C om posite 11 y e a r B a la n c e S h e e ts .

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1

FOREWORD

I n 19 4 8 , a s tu d y was commenced a t th e U n iv e r s it y o f W este rn O n ta r io f o r th e p u rp o s e o f a s s i s t i n g th e b u sin e ssm a n i n a n a ly z in g th e ch an g es w hich hav e b een ta k in g p la c e i n v a r io u s C an ad ian I n d u s t r i e s s in c e 1938. T h is p a p e r i s an a n a l y s i s o f th e C an ad ian P a p e r I n d u s t r y . I n t h i s p a p e r , we have u se d t h i r t e e n f i n a n c i a l r a t i o s w hich we b e ­ l i e v e a r e th e m ost s i g n i f i c a n t o n e s .

The v a r i a t i o n s and th e t r e n d s o v e r

s e v e r a l y e a r s , and v a r io u s o t h e r o b s e r v a ti o n s have b een i n d i c a t e d .

How­

e v e r , t h e r e h a s b een no a tte m p t made to e x p la in th e b a s i c r e a s o n s f o r and th e r e s u l t s o f th e s e c h a n g e s.

We f e e l t h a t we a r e n o t q u a l i f i e d to

make such o b s e r v a ti o n s , and t h e r e f o r e we have l e f t th e i n t e r p r e t a t i o n o f t h e d a ta co m p iled to th e b u sin e ssm e n i n t e r e s t e d i n s tu d y in g c o n d itio n s w ith i n t h i s i n d u s t r y .

London Ap r i l 22, 1950

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M.R.H.

2

ABSTRACT

The s t o r y o f m ost o f th e p a p e r Com panies i n th e e a r l y n in e te e n hun­ d re d s i s one o f r e o r g a n i z a t i o n and r e f i n a n c i n g .

I n eve ry r e o rg a n iz a tio n ,

m ore c a p i t a l was i n v e s t e d , more m i l l s w ere b u i l t , a n d 'a d d i t i o n a l l i m i t s w ere s e c u r e d .

A f t e r th e f i r s t w o rld w ar, Quebec and E a s te r n C anada e x p e r­

ie n c e d an u n p re c e d e n te d grow th i n n e w s p r in t in v e s tm e n t.

B etw een 1919 and

19 3 0 , th e d a i l y c a p a c it y o f n e w s p r in t m a ch in es i n Canada in c r e a s e d by 6 ,0 7 2 to n s o r 220 p e r c e n t. C o - o p e r a tio n b etw een m i l l s f i r s t a r o s e a s a r e s u l t o f j o i n t d e a lin g s w ith s a l e s co m p an ies, and th e e r a o f c o n s o li d a ti o n commenced i n 1925.

An

exam ple o f t h i s i s th e c o n s o li d a ti o n o f th e S t . L aw rence P a p e r , Brom pton and L ake S t . Jo h n i n t o th e S t . L aw rence C o r p o r a tio n . From a f i g u r e o f |7 1 .8 0 a to n i n 1927, th e p r i c e o f n e w s p r in t d ro p p ed to |5 7 in 1931 and d r i f t e d s t e a d i l y downward. had l e f t th e o v e r c a p i t a l i z e d com panies in

P o s tw a r e x p a n s io n by bonds

a v u ln e r a b le p o s i t i o n .

D u rin g

th e 1 9 3 0 's , f a c e d w ith f a l l i n g re v e n u e s and unsound f i n a n c i a l s t r u c t u r e , a lm o s t a l l o f th e im p o r ta n t n e w s p r in t com panies in E a s te r n Canada de­ f a u l t e d on t h e i r bonds and some w ent i n t o r e c e i v e r s h i p . S in c e t h a t tim e th e y have fo llo w e d th e bonded in d e b te d n e s s and f i x e d c h a r g e s .

p o l i c y o f re d u c in g t h e i r

Such a c t i o n h a s p la c e d

them i n

a much m ore f a v o u r a b le p o s i t i o n th a n f o r m e r ly . On th e w h o le, th e com panies ch o sen f o r t h i s s u rv e y a r e a t th e p r e s e n t

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3

tim e p ro d u c in g m a in ly n e w s p r in t and s u l p h i t e p u lp .

C o n s o lid a te d P a p e r i s

th e m ost d i v e r s i f i e d o f th e g ro u p . D u rin g th e l a s t t h i r t y y e a r s , th e m a n u fa c tu re o f p u lp and

p ap er has

c o n s i s t e n t l y b een one o f th e m ost im p o r ta n t i n d u s t r i e s i n C anada.

A l­

th o u g h o v e r ta k e n by o t h e r i n d u s t r i e s o c c a s i o n a l l y , i t h a s b een a b le to r e g a i n i t s im p o r ta n t p o s i t i o n w ith l i t t l e

tro u b le .

The i n d u s t r y h a s been

a g r e a t s o u rc e o f f o r e i g n c a p i t a l . D .B .S . shows th e p r o d u c tio n o f wood p u lp and p a p e r a s 1937 - 226 m i l l i o n

1943 - 344 m i l l i o n

1938 - 184

1944

1939 - 208

1945 - 398

1940 - 298

1946 - 528

1941 - 334

1947 - 707

- 369

1942 - 336

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4

CHAPTER 1

Method, o f P ro c e d u re and S o u rce o f D ata The f o llo w in g f i v e com panies w ere u se d f o r th e p u rp o s e o f t h i s r e p o r t : M ersey P a p e r Company C o n s o lid a te d P a p e r Company S t . L aw rence P a p e r M ill s Company, L im ite d G re a t L ak es P a p e r Company L ake S t . Jo h n Pow er and P a p e r Company, L im ite d C om plete f i n a n c i a l s ta te m e n ts w ere ta k e n from th e F i n a n c ia l P o s t 's S u rv ey o f C o rp o ra te S e c u r i t i e s f o r th e e le v e n y e a r s , 1938 to 1948 i n c l u s i v e . The a u th o r fou n d i t q u i t e d i f f i c u l t to f i n d f i v e o r s i x co m p an ies, w hich he c o n s id e r e d s u f f i c i e n t l y s i m i l a r a s to o p e r a t i o n s , to u s e i n t h i s re p o rt. te n t.

T h ere h a s b een a p ro n o u n ced te n d e n c y to d i v e r s i f y to a w ide ex­ S e v e r a l r e o r g a n i z a t i o n s have ta k e n p l a c e , and v a r io u s o t h e r p ro b lem s

a r o s e , w hich seemed to make i t n o t a d v i s a b l e to u s e s e v e r a l co m p an ies. a r e s u l t , i t i s n o t e x p e c te d t h a t t h i s a n a l y s i s w i l l p r o v id e an e n t i r e l y co m p lete p i c t u r e o f th e C an ad ian P a p e r I n d u s t r y i n a b s o lu t e t o t a l . The f o llo w in g i s a s h o r t resum e o f th e f i v e com panies u s e d i n t h i s re p o rt: M ersey P a p e r Company O p e r a te s n e w s p r in t m i l l a t B ro o k ly n , Nova S c o t i a ; a n n u a l c a p a c ity 1 1 0 ,0 0 0 t o n s .

L ands c o n ta in 2 ,4 0 0 ,0 0 0 c o rd s o f pulpw ood.

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As

5

The G re a t L ak e s P a p e r Company Owns p u lp and p a p e r m i l l a t F o r t W illia m , O n ta r io .

A nnual c a p a c it y ,

1 5 5 ,0 0 0 to n s n e w s p r in t p l u s 4 8 ,0 0 0 to n s u n b le a c h e d s u l p h i t e f o r e x p o r t. S t . L aw rence P a p e r M i l l s Company, L im ite d O p e ra te s n e w s p rin t m i l l a t T h ree R iv e r s , Quebec w ith a n n u a l c a p a c it y 1 8 9 ,8 0 0 to n s n e w s p r in t, 6 ,0 0 0 to n s s u r p lu s s u l p h i t e and 6 ,5 0 0 to n s s u r p lu s groundwood c a p a c it y .

T im ber l i m i t s 1 ,6 0 2 s q u a re m i le s .

L ake S t . Jo h n Pow er and P a p e r Company, L im ite d O p e ra te s u n b le a c h e d s u l p h i t e p u lp and n e w s p r in t m i l l a t D o lb eau , Q uebec, a n n u a l n e w s p r in t c a p a c it y o f 1 0 2 ,6 0 0 to n s ; s u l p h i t e 3 0 ,0 0 0 to n s .

Pulpw ood

r e s o u r c e s 2 ,0 5 9 s q u a re m ile s o f tim b e r l i m i t s . C o n s o lid a te d P a p e r Owns f i v e m i l l s ; t o t a l a n n u a l c a p a c it y 6 7 3 ,0 6 4 to n s n e w s p r in t; 4 8 ,2 0 4 to n s k r a f t p a p e r ; 1 4 ,5 2 3 to n s c a rd b o a rd and w rap p in g p a p e r and 4 8 ,5 4 0 to n s u n b le a c h e d s u l p h i t e p u lp .

M i l l s a t G rand-M ere, S h aw in ig an F a l l s , Gap de l a

M a d e le in e , P o r t A lf r e d and T h ree R iv e r s , Q uebec.

S aw m ills a t Pem broke have

a n n u a l c a p a c it y o f 16 m i l l i o n f e e t .

EG 4091 A1F5

1949

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CHAPTER I I

D e f i n i t i o n o f te rm s u sed R e c e iv a b le s _ a c c o u n ts and n o te s r e c e iv a b le ,

f o r th e s a l e o f p r o ­

d u c ts i n th e r e g u l a r t r a d e q u a r t e r s l e s s any r e s e r v e s f o r b ad d e b t s . 2) C ash and r e c e i v a b l e s - i s a t o t a l o f a c t u a l c a s h , Dom inion B onds, a c c o u n ts and n o te s r e c e iv a b le and te m p o ra ry in v e s tm e n ts . 3) I n v e n t o r i e s - th e sum o f raw m a t e r i a l s , m a t e r i a l s i n p r o c e s s , and f i n i s h e d p r o d u c ts l e s s any r e s e r v e s .

I t d o es n o t in c lu d e s u p p l i e s .

4) T o ta l C u rre n t A s s e t s Cash and a s s e t s t h a t w i l l b e c o n v e rte d i n t o c a s h in

th e no rm al c o u rs e o f o p e r a t io n s w ith in a r e l a t i v e l y s h o r t p e r io d .

5) F ix e d A s s e ts - P r o p e r t i e s o f a t a n g i b l e and r e l a t i v e l y p erm an en t c h a r a c t e r t h a t a r e u se d i n th e b u s in e s s and w hich a r e shown a t c o s t l e s s d e p re c ia tio n . 6) T o ta l C u rre n t L i a b i l i t i e s - T o ta l o f a l l l i a b i l i t i e s due w ith in one y e a r from s ta te m e n t d a t e , i n c lu d in g c u r r e n t paym ent on t r a d e n o t e s , m o rtg a g e s , d e b e n tu r e s o r o t h e r fu n d ed d e b t. 7) T o ta l A s s e ts - T o ta l o f c u r r e n t a s s e t s , in v e s tm e n ts , f i x e d a s s e t s , i n t a n g i b l e a s s e t s , d e f e r r e d c h a rg e s and o t h e r m is c e lla n e o u s a s s e t s e . g . : p e n s io n o r s p e c i a l fu n d . 8) Funded d e b t - M o rtg a g e s, b o n d s, d e b e n tu r e s and o t h e r o b l i g a t i o n s w ith a m a tu r it y d a te o f m ore th a n one y e a r from th e s ta te m e n t d a t e .

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9)

T o ta l L i a b i l i t i e s - T o ta l o f a l l c u r r e n t l i a b i l i t i e s , d e f e r r e d i n ­

come, lo n g te rm d e b t and o t h e r l i a b i l i t i e s . ■*•0) N et Worth - The sum o f a l l o u ts ta n d in g p r e f e r r e d o r p r e f e r e n c e s to c k s and o u ts ta n d in g common s to c k s , s u r p lu s and u n d iv id e d p r o f i t s l e s s any i n t a n g i b l e ite m s i n th e a s s e t s su ch a s g o o d w ill o r tr a d e m a rk s . 11) N et W orking C a p i ta l - The d i f f e r e n c e betw een c u r r e n t a s s e t s and c u rre n t l i a b i l i t i e s . •*-2) N et p r o f i t - P r o f i t a f t e r f u l l d e p r e c i a t i o n on f i x e d a s s e t s a f t e r d e d u c tio n o f r e s e r v e s f o r , o r a c t u a l ta x e s , a f t e r d e d u c tio n s i n i n v e n t o r i e s a t m a rk e t o r c o s t , w h ic h e v e r i s lo w e r a f t e r c h a rg e o f f f o r b ad d e b t s , and a f t e r a l l m is c e lla n e o u s r e s e r v e s and a d ju s tm e n ts b u t b e f o r e d iv id e n d s and w ith d ra w a ls . • 13) Ne t p r o f i t + ta x e s - T o ta l o f n e t p r o f i t ( a s s t a t e d ) p lu s ta x e s f o r p e r io d .

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CHAPTER I I I D e f i n i t i o n o f r a t i o s u se d 1) The C u rre n t R a tio

( C u r r e n t A s s e ts to C u r r e n t L i a b i l i t i e s )

T h is i s o f p rim a ry im p o rta n c e to th e s h o r t term c r e d i t o r s in c e i t i s to th e s e a s s e t s t h a t h e lo o k s c h i e f l y , f o r th e prom pt paym ent o f h i s d e b t. T h is c u r r e n t r a t i o m e a su re s th e b o rro w e rs a b i l i t y to m eet h i s c u r r e n t o b lig a tio n s . 2) Cash and r e c e i v a b l e s to c u r r e n t l i a b i l i t i e s - T h is i s a s u p p le ­ m e n ta ry m easu re o f l i q u i d i t y .

I t i s th e r a t i o b etw ee n th o s e c u r r e n t a s s e t s

w hich can b e m o st r e a d i l y tu r n e d

i n t o cash , and c u r r e n t l i a b i l i t i e s .

A

r a t i o o f 1 :1 i s u s u a ll y c o n s id e r e d f a v o u r a b le s in c e i t i n d i c a t e s , t h a t f o r e v e ry d o l l a r o f c u r r e n t d e b t, t h e r e i s a v a i l a b l e one d o l l a r o f q u ic k a s s e t s w h ich can be tu r n e d i n t o c a sh on s h o r t n o t i c e

to m eet c u r r e n t o b l i g a t i o n s .

3) C u r r e n t l i a b i l i t i e s to t o t a l l i a b i l i t i e s - 'This r a t i o f u r n i s h e s th e c r i t e r i a o f th e im m ed iate demands com pared w ith th e u l t i m a t e demands on c a s h , and a l s o w arns i f a good c u r r e n t r a t i o i s b u t a te m p o ra ry r a t i o . 4) T o ta l A s s e ts to T o ta l L i a b i l i t i e s - I n d i c a t e s th e am ount o f a s s e t s w hich a r e b a c k in g th e s h a r e h o ld e r s money.

T h is r a t i o i s th e n , j u s t an

i n d i c a t i o n o f th e v a lu e o f th e o\«ners s h a r e i n

th e com panies a s s e t s , and

th e r e l a t i v e s e c u r i t y o f t h e i r p o s i t i o n . 5) N et w o rth

to t o t a l l i a b i l i t i e s - % i s i s a n e a s u r e o f th e r e l a t i o n s h i p

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9

b e tw e e n t o t a l b o rrow ed and c o n t r i b u te d c a p i t a l , s in c e i t in c lu d e s a l l l i a b i l i t i e s o f th e

b o rro w e r.

Where th e ow ners c o n t r i b u t i o n i s q u i t e

s m a ll com pared to am ounts due c r e d i t o r s , a sudden slum p m ig h t w ipe o u t c o m p le te ly th e ow ners c a p i t a l , and i n f l i c t heavy l o s s e s to c r e d i t o r s . 6) Met w o rth to f i x e d a s s e t s - T h is r a t i o m e a su re s th e p r o p o r ti o n

o f c o n t r i b u te d c a p i t a l t h a t h a s b een in v e s t e d i n f i z e d p r o p e r ty .

If it

i s u n d e r 100%, f i z e d c a p i t a l i s b e in g p ro v id e d by c r e d i t o r s a s xvell a s o w n ers.

F o r m ost i n d u s t r i a l s t h i s w ould be a m ark o f w eakness, and i n d i ­

c a t e s a n eed f o r a d d i t i o n a l e q u i ty c a p i t a l . 7) Funded d e b t to F iz e d A s s e ts - T h is r a t i o shows th e e z t e n t to Which th e p erm an en t a s s e t s a r e , i n a s e n s e , encum bered even th o u g h p a r t o r a l l o f th e d e b t may b e r e p r e s e n t e d b y n o n -s e c u re d b o n d s . r a t i o , th e l e s s sound i s th e f i n a n c i a l s t r u c t u r e .

The h ig h e r th e

I n some i n d u s t r i e s , how­

e v e r , a h ig h e r r a t i o i s much more a c c e p ta b l e th a n i n o t h e r s . 8) W orking C a p i ta l to F iz e d A s s e ts - T h is r a t i o o f c u r r e n t a s s e t s , a f t e r a llo w in g f o r s e t t l i n g o f c u r r e n t c la im s , to f i z e d a s s e t s m e a su re s, i n a s e n s e , th e l i q u i d i t y o f th e b u s in e s s . 9) W orking c a p i t a l t o n e t w o rth - T h is r a t i o i n d i c a t e s to a d e g re e th e l i q u i d i t y o f th e company, o r th e amount o f re a d y a s s e t s w h ich w ould b e a v a i l a b l e f o r th e ow ners, b u t n o t ta k in g i n t o a c c o u n t fu n d ed d e b t. 10) W orking c a p i t a l to I n v e n to r y - T h is r a t i o shows th e e z t e n t to w hich w orking c a p i t a l i s t i e d up i n in v e n to r y . r a t i o in

The d e s i r a b i l i t y o f a h ig h o r low

t h i s c o n n e c tio n d ep en d s, i n p a r t , on th e c o n d itio n o f b u s in e s s

i n g e n e r a l. 11) I n v e n to r y to r e c e i v a b l e s - A kin to th e r e l a t i o n s h i p o f c a s h and

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r e c e i v a b l e s to c u r r e n t l i a b i l i t i e s , i s th e p r o p o r tio n o f i n v e n t o r i e s to re c e iv a b le s .

T h is i s b a s e d on

th e f a c t

t h a t in v e n to r y r e p r e s e n t s , o r i n

m o st e s ta b lis h m e n ts sh o u ld r e p r e s e n t c o s t f i g u r e s , w h ile r e c e i v a b l e s p r e ­ sum ably in c lu d e p r o f i t .

Thus a change i n th e r a t i o may b e due to th e

m aking o f p r o f i t a b l e b u s in e s s t r a n s a c t i o n , o r i t may b e due m e re ly to a change i n

th e form o f th e a s s e t .

F u rth e rm o re , t h i s r a t i o i s o f some im­

p o r ta n c e w ith r e f e r e n c e to th e a p p a r e n t

p o s i t i o n o f th e b u s in e s s c y c le .

I n v e n to r y i s s u b je c t to v a lu e ch an g es e i t h e r upw ard o r downward, r e c e i v a b l e s g e n e r a l l y a r e n o t. 12) N et p r o f i t to N et w o rth - T h is r a t i o , w hich i n d i c a t e s th e r a t e o f r e t u r n on th e c a p i t a l and s u r p lu s , a f f o r d s an in d e x o f th e p r o f i t a b l e n e s s o f th e in v e s t e d c a p i t a l e x c lu d in g fu n d e d d e b t.

T h is i s som etim es c a l l e d

th e r a t i o o f e a r n in g s to in v e s tm e n ts . 13) N et p r o f i t and ta x e s to N et w o rth - T h is r a t i o i s s i m i l a r i n n a t u r e t o N et P r o f i t to N et W orth, b u t i t i n d i c a t e s m ore c l e a r l y th e e f f i c i e n c y w ith w hich th e com panies hav e u se d t h e i r c a p i t a l .

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11

CHAPTER IT

M e c h a n ic a l P ro c e d u re I n th e a n a l y s i s , an i n d u s t r y a v e ra g e f o r eac h o f th e r a t i o s h as b e e n fo u n d f o r th e p e r io d c o v e re d .

T h is i n d u s t r y a v e ra g e

h a s b e e n com puted i n

th r e e d i f f e r e n t w ays, a s f o llo w s : 1 s t - by a v e r a g in g th e a n n u a l i n d u s t r y r a t i o s , o b ta in e d by u s e of

co m p o site a n n u a l s ta te m e n ts .

2nd - by a v e r a g in g th e a n n u a l company r a t i o s , o b ta in e d b y u se o f th e a n n u a l s ta te m e n t o f eac h company. 3 rd - by a v e r a g in g th e 11 y e a r p e r io d company r a t i o s , o b ta in e d b y u s e o f an 11 y e a r co m p o site b a la n c e s h e e t f o r each company. The r e s u l t f o r eac h r a t i o , o b ta in e d b y ea c h h a s b een a v e ra g e d

o f th e above t h r e e m eth o d s,

to p r o v id e an o v e r a l l i n d u s t r y a v e r a g e , th e r e b y s u p p ly in g

a com prom ise f i g u r e c o v e rin g th e t h r e e m ethods o f a p p ro a c h t h a t a r e a v a i l ­ a b l e to o b t a i n an i n d u s t r y f i g u r e .

Such r a t i o d o es n o t n e c e s s a r i l y r e p r e ­

s e n t an i d e a l f o r a l l com panies i n th e in d u s t r y , b u t i t may b e c o n s id e r e d a s r e p r e s e n t a t i v e o f t h i s in d u s t r y . The p r o c e d u r e , u se d i n c a l c u l a t i n g and t a b u l a t i n g th e in f o r m a tio n i n t h i s a n a l y s i s , i s s i m i l a r to t h a t u s e d by J . M. Geddes i n h i s r e p o r t on th e C an ad ian M ill in g I n d u s t r y .

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12

F o r th e r a t i o s o b ta in e d by u s e o f co m p o site a n n u a l s ta te m e n ts , th e d e t a i l i s a s f o llo w s :

F i r s t a b a la n c e s h e e t form was

c o n s tr u c t e d ,

and th e b a la n c e s h e e t o f eac h company was a d j u s t e d to t h i s fo rm .

The

a n n u a l s ta te m e n ts f o r e a c h o f th e com panies w ere th e n a r r a n g e d and ta b u ­ la te d by y e a rs .

A ll th e s ta te m e n ts f o r e a c h i n d i v i d u a l y e a r w ere b ro u g h t

t o g e t h e r to com pute a co m p o site b a la n c e s h e e t f o r e a c h y e a r .

T h is p r o ­

c e d u re i s shown i n c h a r t s #6 to 1 6 . The r a t i o s f o r th e c o m p o site s ta te m e n ts w ere c a l c u l a t e d f o r each y e a r a s shown i n c h a r t # 1 7 .

C h a rt #1 i s a ta k e o f f from c h a r t # 1 7 ,

e l im i n a t i n g th e f i g u r e s u s e d i n th e c o m p u ta tio n s , show ing o n ly th e r a t i o s d e r iv e d from th e co m p o site s ta te m e n ts f o r ea c h

o f th e e le v e n y e a r s .

The

f i r s t i n d u s t r y a v e ra g e , f o r each r a t i o , was c a l c u l a t e d by ta k in g an a v e r ­ age o f a l l th e y e a r s . F o r th e i n d u s t r y a v e ra g e r a t i o s , o b ta in e d by a v e ra g in g th e

in d iv i­

d u a l r a t i o s from eac h o f th e a n n u a l s ta te m e n ts o f eac h company, th e d e t a i l i s a s f o llo w s :

Each a n n u a l r a t i o f o r each i n d i v i d u a l company was

c a l c u l a t e d from eac h company a n n u a l s ta te m e n t.

T h ese r a t i o s w ere t a b u l a t e d

i n two ways: 1 s t - b y a s e p a r a t e c h a r t f o r ea c h y e a r , c o n ta in in g th e r a t i o s f o r a l l co m p an ies, a s p e r c h a r t s #18 to 28. 2nd - by a s e p a r a t e c h a r t f o r eac h company, c o n ta in in g th e r a t i o s f o r a l l th e y e a r s , a s p e r c h a r t s #29 to 33. On c h a r t s #18 to 28, th e r a t i o s a r e l i s t e d w ith eac h y e a r on a s e p a r a t e c h a r t .

f o r eac h o f th e co m p an ies,

An a v e ra g e o f eac h o f th e r a t i o s shown

on ea c h o f th e s e c h a r t s , s u p p lie s i n d u s t r y a v e ra g e r a t i o s f o r th e y e a r

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13

c o n c e rn e d .

An

a v e ra g e o f eac h o f th e s e

v id e s th e seco n d i n d u s t r y a v e ra g e . f o r each y e a r on

r a t i o s f o r a l l th e y e a r s p r o ­

The i n d u s t r y a v e ra g e

r a t i o s o b ta in e d

c h a r t s #18 to 28 hav e b e e n sum m arized and a v e ra g e d on

c h a rt #2. On c h a r t s #29 to 3 3 , th e seco n d t a b u l a t i o n m e n tio n ed i n th e seco n d p r e c e d in g p a r a g r a p h , a l l th e annu a l f o r e a c h company.

r a t i o s a r e l i s t e d on a s e p a r a t e c h a r t

T h ere i s a l s o an a v e ra g e o f a l l th e y e a r s c o v e re d to

p ro v id e a company a v e ra g e o f e a c h a n n u a l r a t i o f o r th e p e r io d .

(A v e ra g in g

th e s e " p e r io d ” a v e ra g e s o f ea c h o f th e com panies w ould, o f c o u r s e , s u p p ly a v e r i f i c a t i o n o f o u r p r e v io u s l y com puted seco n d i n d u s t r y a v e r a g e .) c h a r t s w ere p r o v id e d

T hese

so t h a t th e p r o g r e s s iv e ch an g es i n th e f i n a n c i a l

s t a t u s o f ea c h company o v e r th e p e r io d o f y e a r s can b e s t u d i e d .

A fu rth e r

colum n e n t i t l e d "11 y e a r company co m p o site " h a s b e e n ad d ed a t th e r i g h t hand s id e f o r f u r t h e r co m p ariso n u s e .

A d e s c r i p t i o n o f i t s s o u rc e i s i n

th e f o llo w in g p a r a g r a p h . F o r i n d u s t r y a v e ra g e r a t i o s

o b ta in e d from an -elev en y e a r

s ta te m e n t f o r eae h company, th e d e t a i l i s a s f o llo w s :

co m p o site

The a n n u a l s t a t e ­

m en ts f o r eac h o f th e e le v e n y e a r s f o r a company w ere added t o g e t h e r to p r o v id e an e le v e n y e a r

co m p o site s ta te m e n t f o r t h a t

i s shown i n c h a r t s #34 to 38.

company.

T h is d a t a

From th e s e co m p o site s ta te m e n ts , r a t i o s w ere

com puted, th e d e t a i l o f w hich i s shown i n

c h a r t #39 on c h a r t # 3 , w here

th e y a r e a l s o a v e ra g e d to s u p p ly th e t h i r d i n d u s t r y a v e ra g e .

The "11 y e a r

company co m p o site " r a t i o s from c h a r t #39 w ere a l s o t r a n s f e r r e d t o t h e i r r e s ­ p e c t i v e c h a r t s #29 to 33, a s r e f e r r e d to i n th e p r e c e d in g p a r a g r a p h . The

t h r e e i n d u s t r y a v e ra g e s f o r eac h o f th e r a t i o s a r e t a b u l a t e d i n

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14

C h a rt #4.

An a v e ra g e o f th e t h r e e was ta k e n , w hich may b e u se d a s a r e ­

p r e s e n t a t i v e o r o v e r a l l i n d u s t r y a v e ra g e . The t h r e e d i f f e r e n t m ethods o f c a l c u l a t i n g r a t i o s f o r • t h e i n d u s t r y a v e ra g e s w ere u se d b e c a u s e ea c h r e f l e c t s an em p h asis from a d i f f e r e n t view ­ p o in t.

An a n a l y s t may have g e n e r a l p r e f e r e n c e f o r

one m ethod, b u t u n d e r

c e r t a i n c irc u m s ta n c e s m ig h t b e w e ll a d v is e d to make u s e o f a n o th e r . The i n d u s t r y r a t i o s , c a l c u l a t e d from th e co m p o site a n n u a l b a la n c e s h e e ts and a s shown i n c h a r t # 1 , w eig h s ea c h company a c c o r d in g to i t s f i n a n c i a l s iz e .

J-t p r o v id e s a good a v e ra g e f o r th e i n d u s t r y when c o n s id e r e d , f o r

exam ple, from a N a tio n a l volum e o f p r o d u c tio n v ie w p o in t.

However, su ch

w o u ld "n o t f u l l y i n d i c a t e th e e f f e c t o f an e x c e l l e n t f i n a n c i a l s t a t u s o f com panies whose volum e i s s m a lle r th a n

th e a v e ra g e .

The in d e a tr y r a t i o s , c a l c u l a t e d by a v e r a g in g th e a n n u a l r a t i o s f o r e a c h o f th e com panies and a s s h o rn i n c h a r t $ 2 , w eig h s a l l o f th e com­ p a n ie s e q u a l ly .

N a t u r a l l y , th e s e r a t i o s n e g l e c t e n t i r e l y any e f f e c t due

to th e f a c t o r o f p r o d u c tio n volum e, b u t a s r e p r e s e n t a t i v e i n d u s t r y a v e r a g e s , th e y may b e m ore a c c e p ta b le f o r g e n e r a l u s e and f o r in te r-c o m p a n y c o m p a riso n s, th a n th o s e shown i n c h a r t # 1 . The i n d u s t r y r a t i o s , c a l c u l a t e d from a v e r a g in g th e r a t i o s o b ta in e d f o r ea c h company from th e c o m p o site 11 y e a r b a la n c e s h e e ts and a s shown i n c h a r t # 3 , w eig h s ea c h company e q u a l ly a c c o rd in g to i t s a v e ra g e s i z e o v e r th e 11 y e a r p e r io d .

T h is m ethod p r o v id e s a good r e p r e s e n t a t i v e in d u s ­

t r y a v e ra g e a s i t a p p e a r s to com prom ise th e o t h e r two m eth o d s to some e x te n t.

I t would p r o b a b ly b e a c h o ic e f o r in tra -c o m p a n y c o m p a riso n s.

A fu rth e r

co m p ariso n , b etw een a v e r a g in g a n n u a l r a t i o s and r a t i o s

d e v e lo p e d from a co m p o site 11 y e a r b a la n c e s h e e t, i s a v a i l a b l e on c h a r t s

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15

#29 to 33 i n th e l e f t and r i g h t hand colum ns.

The co m p ariso n i n t h i s

c a s e i s c o n fin e d to th e r a t i o s f o r ea c h i n d i v i d u a l company. th e e f f e c t

o f u s in g th e c o m p o site b a la n c e s h e e ts i s to d e f l a t e th e r e ­

s u l t o b ta in e d b y a v e r a g in g th e a n n u a l r a t i o s .

T h is i s m ore p ro n o u n ced

i n th o s e c a s e s w here t h e r e i s a g r e a t e r ra n g e i n a ra tio .

I n g e n e r a l,

th e a n n u a l r e s u l t s f o r

C o n v e rs e ly , i n p r a c t i c a l l y a l l c a s e s w here th e ra n g e i s c l o s e l y

c o n f in e d , b o th m ethods p ro d u c e p r a c t i c a l l y th e same r e s u l t . to t h i s g e n e r a l e f f e c t i s in

The e x c e p tio n

th e r a t i o s NP/NW and HP + Taxes/NW.

In

th e s e two i n s t a n c e s , f o r a l l c a s e s e n c o u n te re d , th e r a t i o o b ta in e d from th e

co m p o site b a la n c e s h e e t i s c o n s id e r a b ly g r e a t e r th a n t h a t o b ta in e d

b y a v e ra g in g th e a n n u a l r a t i o s . C h a rt #5 p r o v id e s th e ra n g e o f v a r i a t i o n w hich i s p r e s e n t i n each o f th e r a t i o s , among th e v a r io u s com panies f o r th e y e a r 1948 and f o r 1938. The d e t a i l o f th e c o m p u ta tio n s i s a s fo llo w s :

F o r a c e r t a i n r a t i o , th e

in d u s t r y a v e ra g e was assum ed to b e 100%, and f o r ea c h o f th e co m p an ies, i t s ra tio

was e x p re s s e d a s a p e r c e n ta g e o f t h i s i n d u s t r y r a t i o .

The

company h a v in g th e h ig h e s t r a t i o , a s e x p re s s e d i n t h i s p e r c e n ta g e , and c

th e company h a v in g th e lo w e s t w ere n o te d , th e d i f f e r e n c e in a g e s p r o v id in g th e ra n g e o f v a r i a t i o n .

th e p e r c e n t­

T h is was done f o r ea c h o f th e

r a t i o s f o r th e y e a r s o f 1948 and 19 3 8 . I t s h o u ld b e n o te d t h a t i n th o s e e a s e s w here some ite m , su ch a s Funded D eb t, N et P r o f i t and T ax e s, was n o t a v a i l a b l e , th e i n d u s t r y a v e r ­ ag e was c a l c u l a t e d b a s e d on th e com panies f o r w hich th e f i g u r e s w ere a v a ila b le .

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16

CHAPTER Y

S tu d y o f R a tio s 1.

C u r r e n t A s s e ts to C u r r e n t L i a b i l i t i e s - CA/CL

T h is r a t i o i n d i c a t e s th e im m ed iate s o lv e n c y o f a company o r i n d u s t r y , and th e p o s s i b l e m a rg in o f s h r in k a g e o f c u r r e n t a s s e t s b e f o r e

th e

i n t e r e s t s o f th e c r e d i t o r s w ould b e en d a n g e re d . C h a rt §1 shows t h a t , on th e w h o le, th e c u r r e n t a s s e t p o s i t i o n o f th e i n d u s t r y was f a i r l y good o v e r th e p e r io d . d u r in g th e w ar.

The h ig h e s t r a t i o was re a c h e d

From a lo w o f 2 .5 0 i n 1939 i t g r a d u a l ly r o s e to a peak

o f 5 .6 3 i n 1944 and th e n dro p p ed o f f s l i g h t l y .

The a v e ra g e i n d u s t r y

r a t i o o v e r t h i s p e r io d was 4 .0 9 . C h a rt §2 w eighs

a l l th e com panies e q u a l ly , w h ereas C h a rt §1 ta k e s i n ­

to c o n s id e r a tio n th e v a r y in g s i z e o f th e com panies th ro u g h w e ig h in g them p r o p o r t i o n a t e l y .

Thus i n C h a rt # 2 , we f i n d a g r e a t e r ra n g e betw een

t h e h ig h and th e lo w , ifa company r a t i o , su ch

a s th e r e l a t i v e l y h ig h Lake

S t . Jo h n one

i n d u s t r y a v e ra g e r a t i o

f o r 1944 and 1945, e f f e c t s th e

much m ore i n th e C h a rt #2 th a n i n th e C h a rt # 1 .

The h ig h f i g u r e was 6 .1 7

i n 1944, h a v in g r i s e n from a lo w o f 1 .7 5 i n 1938. I n b o th C h a rts #1 and 2 , t h e r e i s a s l i g h t i n c r e a s e

i n th e r a t i o i n

1948. C h a rt jf'i

i n d i c a t e s t h a t th e Ch/CL r a t i o s , when b a s e d on e a c h com pany's

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17

c o m p o site 11 y e a r b a la n c e s h e e t s , a r e w ith in f a i r l y c l o s e ra n g e o f each o th e r .,

M ersey shows th e lo w e s t r a t i o , 2 .9 6 , and L ake S t . Jo h n th e h ig h e s t

a t 4 .0 2 .

The ra n g e c o v e re d by th e v a r io u s com panies i s 30% o f th e i n d u s t r y

a v e ra g e o f 3 .4 2 . The o v e r a l l i n d u s t r y a v e ra g e a s c a l c u l a t e d i n C h a rt $4 i s 3 .7 9 . C h a rt $5 i n a l l c a s e s shows t h a t th e ra n g e b etw een h ig h and lo w h as d e c r e a s e c o n s id e r a b ly s in c e 1938, a l l com panies a p p a r e n tly c o n s o li d a ti n g t h e i r p o s i t i o n i n th e in d u s t r y . 2.

Cash & R e c e iv a b le s to C u r r e n t L i a b i l i t i e s - Cash & Rec/CL

T h is r a t i o e l im i n a te s th e u n c e r t a i n m a r k e t a b i l i t y o f th e in v e n to r y w h ich , a t c e r t a i n tim e s , may b e q u i t e d i f f i c u l t to l i q u i d a t e . T h is r a t i o i s c l o s e l y a l l i e d to th e c u r r e n t r a t i o and i n t h i s c a s e fo llo w s th e c u r r e n t r a t i o v e ry c l o s e l y . h ig h o f 2 .9 9 a s i n d i c a t e d i n C h a rt # 1 .

I n 1944, th e r a t i o re a c h e d a I n g e n e r a l t h i s h ig h r a t i o d u rin g

th e w ar y e a r s seems to hav e b e e n caused a s shown i n C h a rt #17 by a c o n s id ­ e r a b l e i n c r e a s e i n c a s h w h ile a c c o u n ts r e c e iv a b le d e c lin e d s l i g h t l y b u t n o t a s g r e a t a s th e c o in c id e n t r i s e i n c a s h .

The r a t i o h a s d i s t i n c t l y

f a l l e n o f f s in c e th e ?rar y e a r s , w ith a p ic k up e v id e n t i n 1948. C h a rt #2 a g a in shows th e e f f e c t o f w eig h in g th e com panies e q u a lly . The

h ig h i n t h i s c a s e i s 3 .6 4 in 1944 and th e low i s .5 2 i n 1938.

I n d u s t r y a v e ra g e f o r C h a r ts #1 and 2 a r e

The

1 .7 2 and 1 .8 4 r e s p e c t i v e l y .

C h a rt #3 g iv e s th e a v e ra g e f o r th e co m p o site 11 y e a r b a la n c e s h e e ts ■ r a t i o s a s 1 .3 7 . about

E ach

o f th e company r a t i o s a r e g ro u p ed v e ry c l o s e l y

t h i s a v e ra g e .

C h a rt #4 g iv e s

u s an o v e r a l l i n d u s t r y a v e ra g e o f 1 .6 4 .

R ep ro d u ced with p erm ission o f th e copyright ow ner. Further reproduction prohibited w ithout perm ission.

#

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3.

C u r r e n t L i a b i l i t i e s to T o ta l L i a b i l i t i e s - CL/11,

T h is r a t i o com pares th e im m ed iate demands on c a sh w ith th e u l t i m a t e demands on c a s h , and a l s o w arns i f a good c u r r e n t r a t i o i s b u t a tem poraryone. C h a rt #1 shows a c o n tin u o u s tr e n d upw ard from a low o f .0 5 4 i n 1938 t o a h ig h o f .£40 i n 19 4 7 . i n C h a rt # 2 .

Such i s i n e v id e n c e f o r o n ly 1946 and 1947

I n g e n e r a l, a s i n d i c a t e d by C h a rt # 1 7 , th e t o t a l l i a b i l i t i e s

rem ain ed f a i r l y s te a d y from 1938 to a b o u t 1946 w ith a te n d in g to r i s e somewhat d u r in g t h i s p e r io d . The i n d u s t r y a v e ra g e a s t a b u l a t e d i n C h a r ts §1 and #2 a r e .1 2 5 and .2 7 6 r e s p e c t i v e l y . C h a rt #3 i n d i c a t e s t h a t t h e r e i s no c o n n e c tio n b etw een t h i s r a t i o and th e s i z e o f th e company.

The s m a l le s t company, M ersey , h a s a r a t i o

o f .1 0 and th e l a r g e s t company, C o n s o lid a te d , h a s a r a t i o o f .1 4 .

The

a v e ra g e f o r th e i n d u s t r y i n t h i s c a s e i s .3 3 . C h a rt #4 g iv e s u s an o v e r a l l i n d u s t r y a v e ra g e o f .2 5 . 4.

T o ta l A s s e ts to T o ta l L i a b i l i t i e s - TA/TL

T h is r a t i o i s an i n d i c a t i o n o f th e p r e p o r ti o n o f th e ow ners c o n t r i b u t i o n and th e r e l a t i v e s e c u r i t y o f t h e i r p o s i t i o n . C h a rt #1 shows a f a i r l y s te a d y r a t i o from 1939 o n . from a lo w o f .8 4 r e a c h in g a h ig h o f 1 .5 5 i n 194-4.

The r a t i o r o s e

The i n d u s t r y a v e ra g e

i s 1 .4 2 . C h a rt #2 shows a much m ore d e f i n i t e r i s i n g from 2 .4 7 i n 1938 to 6 .4 1 i n 1944 th e n d ro p p in g o f f t o 1 .8 0 i n 1948.

T h is r a t i o i s e f f e c t e d

c o n s id e r a b ly by th e e x tre m e ly h ig h r a t i o o f th e S t . L aw rence Co. d u r in g th e

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19

CH'MXT ;ff m id d le y e a r s a s shown i n E x h ib it 31.

T h is i s a g a in shown i n th e h ig h

i n d u s t r y a v e ra g e o f 4 .0 5 a s com pared to 1 .4 2 i n C h a rt # 1 . C h a rt $3 shows an i n d u s t r y a v e ra g e o f 2 .7 6 .

T h ere d o es n o t seem to

b e any c o n n e c tio n b etw een t h i s r a t i o and th e s i z e o f th e company.

The

S t . L aw rence Company f i g u r e o f 7 .5 8 s ta n d s o u t s h a r p ly from th e o t h e r s . I t was q u i t e h ig h d u r in g a l l o f th e w ar y e a r s , a s shown on C h a rt # 3 1 , when t h e r e was a c o n s id e r a b le r e d u c t io n i n th e bank lo a n s and i n th e t o t a l l i a b i l i t i e s , a s shown on C h a rt # 3 4 . The o v e r a l l i n d u s t r y a v e ra g e a s c a l c u l a t e d i n C h a rt #4 i s 2 .7 7 . C h a rt §5 i n d i c a t e s t h a t th e ra n g e , 1948 v e r s u s 1938 h a s b e e n re d u c e d i n t h i s r a t i o a s much a s any o f th e o t h e r r a t i o s . 5.

Met ?fo rth to T o ta l L i a b i l i t i e s - NW/ih

T h is r a t i o shows th e r e l a t i o n s h i p e x i s t i n g betw een th e o w n ersh ip o f th e b u s in e s s and th e c r e d i t o r s . C h a rt #1 shows a s l i g h t tr e n d upw ard, a lth o u g h i t d oes n o t v a ry f a r fram th e i n d u s t r y a v e ra g e o f .4 7 .

I t i n c r e a s e s from a lo w o f .3 4 i n 1938

to a h ig h o f .5 4 i n 1944. C h a rt #2 shows a much m ore d e f i n i t e p a t t e r n .

I t r e a c h e s a peak o f

5 .5 3 i n 1944 from 1 .4 7 i n 1938 and th e n f a l l s o f f to .8 0 i n 1948.

The

e f f e c t o f th e h ig h S t . L aw rence r a t i o i s a g a in f e l t h e r e , th e r e a s o n b e in g a s co v e re d i n th e p r e v io u s ite m .

C h a rt #17 shows t h a t th e N W o f th e

c o m p a n ie s a s a xvhole h a v e b e e n g r a d u a l l y i n c r e a s i n g s i n c e 1938 w h ile t h e

t o t a l l i a b i l i t i e s te n d e d d e c r e a s e from 1938 to 1945.

The i n d u s t r y r a t i o

f o r C h a rt #2 i s 3 .0 5 .

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20

C h a rt #5 g iv e s an i n d u s t r y a v e ra g e o f 1 .7 5 w ith th e S t . L aw rence r a t i o n o t i c e a b l y above a l l th e o t h e r s .

The o v e r a l l i n d u s t r y a v e ra g e a s

co m p iled i n C h a rt $4 i s 1 .7 6 6.

N et W orth to F ix e d A s s e ts - M /F A

T h is r a t i o g iv e s some

id e a o f th e p r o p o r ti o n o f th e s to c k h o ld e r s

fu n d s t h a t have been a p p lie d to f i x e d a s s e t s .

If

i t i s u n d e r 100'$,

f i x e d c a p i t a l i s b e in g p ro v id e d by c r e d i t o r s a s w e ll a s th e o w n ers.

For

m ost i n d u s t r i a l s t h i s w ould b e a mark o f w eak n ess, and i n d i c a t e s a need f o r a d d i t i o n a l e q u ity c a p i t a l . C h a rt #1 shows a g r a d u a l ly and c o n tin u o u s ly in c r e a s i n g r a t i o from .3 3 i n

1938 to a h ig h o f .7 1 i n 1948.

#2 in c r e a s i n g from .5 4 i n 1938 to .9 3 i n

The same tr e n d i s shown i n C h a rt 1947.

A co m p ariso n o f C h a rts

/ / l , 2 and 3 i n d i c a t e s no p a r t i c u l a r c o r r e l a t i o n b etw een s i z e o f a com­ p an y and i t s r a t i o . T h ree o f th e com panies have a f a i r l y s te a d y n e t w o rth o v e r th e e le v e n

y e a rs.

N et w o rth i s g r a d u a l ly i n c r e a s i n g f o r C o n s o lid a te d and

g r a d u a l ly d e c r e a s in g f o r S t . L aw ren ce.

C h a rt f l 7 shows t h a t on th e w h ole,

n e t w o rth i s i n c r e a s i n g and f i x e d a s s e t s have d e c r e a s e d s l i g h t l y . The t h r e e i n d u s t r y a v e ra g e s a s co m p iled i n C h a r ts # 1 , 2 and 3 ( .5 2 ; .7 0 ;

.6 8 ) g iv e s u s an o v e r a l l i n d u s t r y a v e ra g e o f 7.

.6 3 .

Funded D ebt to F ix e d A s s e ts - FD/FA

T h is r a t i o p o i n t s to th e e x t e n t to w hich th e p e im a n e n t

a s s e ts a re ,

i n a s e n s e , encum bered, even th o u g h p a r t o r a l l o f th e d e b t may b e r e p r e ­ s e n te d b y b o n d s. I t s h o u ld b e n o te d h e r e t h a t S t . L aw rence had no fu n d ed d e b t d u r in g

R ep ro d u ced with p erm ission o f th e copyright ow ner. Further reproduction prohibited w ithout perm ission.

21

t h i s p e r io d , and t h a t th e g e n e r a l tr e n d was to re d u c e fu n d ed d e b t. C h a r t $1 shows an i n c r e a s e fro m .7 2 i n 1938 t o .8 3 i n 1 9 4 4 a n d h a s b e e n d e c r e a s i n g s i n c e t h a t tim e .

C h a r t #2 shows som ew hat t h e

A b e t t e r i n d i c a t i o n o f th e s e tu p can b e s e e n b y a n a ly s in g th e r a t i o s o v e r th e p e r io d .

same t r e n d .

company

G re a t L ak e s shows a p r e t t y s te a d y r a t i o .

M ersey

and L ake S t . Jo h n show a d e f i n i t e tr e n d downward, w h ile C o n s o lid a te d shows an upw ard tr e n d t i l l 1945 and th e n g r a d u a l ly d e c l i n i n g . C h a r ts #1 and 2 show i n d u s t r y a v e ra g e o f .7 2 and .5 3 r e s p e c t i v e l y . C h a rt #3 shows t h a t , i n g e n e r a l, th e r a t i o o f th e l a r g e r company was c o n s id e r a b ly h ig h e r th a n th e s m a l le r o n e s , p o i n t i n g to a l i k e l y r e l a t i o n ­ s h ip b etw ee n th e r a t i o and th e s i z e o f th e company.

The

h e r e i s .5 1 , and th e o v e r a l l i n d u s t r y a v e ra g e i s a t .5 8 .

i n d u s t r y a v e ra g e C h a rt #17 shows

t h a t fu n d ed d e b t h a s b een d e c l i n i n g s in c e 1938. 8. T h is

W orking C a p i ta l to F ix e d A s s e ts - WC/FA i s th e e x t e n t to w hich w o rk in g c a p i t a l i s t i e d up i n f ix e d

a s s e ts . I n b o th C h a rts #1 and #2 th e tr e n d i s upw ard. .0 9 i n 1938 to .6 2 i n 19 4 8 , and i n

I n th e f i r s t c a s e from

th e seco n d from .089 to .5 1 8 .

C h a rt

#29 to #33 shows t h a t th e l a r g e r co m p an ies, i n g e n e r a l, had a h ig h e r r a t i o th a n th e s m a l le r . C h a rt #17 shows t h a t th e w orking c a p i t a l h a s b e e n g r a d u a l ly and c o n tin u o u s ly i n c r e a s i n g to a n o t i c e a b l e e x t e n t o v e r th e e le v e n y e a r s w ith th e e x c e p tio n o f 1945 and 1946, w h ile f i x e d a s s e t s d e c re a s e d ea c h y e a r from 1938 to 1945. The i n d u s t r y a v e ra g e s a s t a b u l a t e d i n C h a rts #1 and 2 a r e .3 9 and .3 4

R ep ro d u ced with p erm ission o f th e copyright ow ner. Further reproduction prohibited w ithout perm ission.

22

re s p e c tiv e ly . C h a rt #3 i n d i c a t e s pany and th e r a t i o .

some c o r r e l a t i o n b etw een th e s i z e o f th e com­

I n t h i s c a s e , C o n s o lid a te d h a s a r a t i o o f .5 1 and

M ersey h a s a r a t i o o f .1 5 .

C h a rt #3 g iv e s an i n d u s t r y a v e ra g e o f .3 2 .

C h a rt #4 shows th e o v e r a l l i n d u s t r y a v e ra g e a t .3 5 . 9.

W orking C a p i ta l to M et W orth - WC/NW

T h is r a t i o i n d i c a t e s th e amount o f c u r r e n t a s s e t s w hich w ould be a v a i l a b l e f o r th e ow ners n o t t a k in g i n t o c o n s id e r a tio n fu n d ed d e b t. I n C h a rt #1 t h i s r a t i o r i s e s from .2 6 i n 1939 to a h ig h o f .9 2 i n 1945. The i n d u s t r y a v e ra g e i s .8 1 .

C h a rts #29 to #33 g iv e some i n d i c a t i o n t h a t

th e l a r g e r com panies a r e i n a b e t t e r p o s i t i o n to g iv e th e p r o s p e c ti v e i n v e s t o r g r e a t e r s a f e t y th a n th e s m a l le r company i s a b le to do i n so f a r a s t h i s i n d i c a t o r i s c o n c e rn e d .

T h is shows up i n C h a rt #3 b u t th e c o r r e ­

l a t i o n i s n o t a s p o s i t i v e a s i n th e c a s e o f WC/IA. The I n d u s t r y a v e ra g e f o r C h a rt #3 i s .7 8 and th e o v e r a l l a v e ra g e a s com piled i n C h a rt #4 i s .7 6 . 10.

W orking C a p i ta l

to I n v e n to r y - WC/lnv

T h is r a t i o shows th e e x t e n t to w hich w o rk in g c a p i t a l i s t i e d up in in v e n to r y . C h a rt #1 shows t h i s r a t i o r i s i n g from a low o f .4 8 to 2 .0 2 in 1944 and th e n d e c r e a s in g to .8 4 i n 1947. a lth o u g h n o t q u it e a s p ro n o u n ced . a r e 1 .3 1 and 1 .2 6 r e s p e c t i v e l y .

C h a rt #2 shows t h i s same tr e n d The i n d u s t r y a v e ra g e s i n b o th c a s e s

The s i z e o f th e company d o es n o t seem

t o e f f e c t t h i s r a t i o v e r y much a s shown i n C h a rts #29 to 33. C h a rt #17 shows t h a t w orking c a p i t a l i n c r e a s e d q u i t e s u b s t a n t i a l l y

R ep ro d u ced with p erm ission o f th e copyright ow ner. Further reproduction prohibited w ithout perm ission.

23

and s t e a d i l y f o r th e w hole p e r io d w ith th e e x c e p tio n o f y e a r s 1945 and 19 4 6 , w h ile th e in v e n to r y rem ain ed f a i r l y c o n s ta n t u n t i l 1944, i t th e n b e g a n to in c r e a s e c o n s id e r a b ly .

U n d o u b ted ly t h i s l a t t e r i s due to

g r e a t l y in c r e a s e d s a l e s s in c e th e end o f th e w ar, a m a jo r it y o f i t e x p o rte d to th e U .S. The o v e r a l l i n d u s t r y a v e ra g e i s 1 .2 6 . C h a rt $5 i n d i c a t e s c o n s id e r a b le 11,

change i n th e r a n g e , 1948 v e r s u s 1938.

I n v e n t o r i e s to R e c e iv a b le s - In v /R e c

T h is r a t i o h a s a r e l a t i o n s h i p to th e r a t i o o f c a s h and r e c e i v a b l e s to c u rre n t l i a b i l i t i e s .

T h is i s b a s e d on th e f a c t t h a t in v e n to r y r e p r e ­

s e n t s , o r i n m ost c a s e s s h o u ld r e p r e s e n t c o s t f i g u r e s , w h ile r e c e i v a b l e s p re su m a b ly in c lu d e a p r o f i t .

Thus a ch an g e i n th e r a t i o may b e due to

th e m aking o f p r o f i t a b l e b u s in e s s t r a n s a c t i o n s , o r i t may b e due to a change i n th e form o f a s s e t s . w ith r e f e r e n c e

F u r t h e r t h i s r a t i o i s o f some im p o rta n c e

to th e b u s in e s s c y c l e .

I n v e n to r y i s s u b j e c t to v a lu e

ch an g es e i t h e r upw ard o r downward, r e c e i v a b l e s a r e g e n e r a l l y n o t. A t th e p r e s e n t tim e , b o th C h a rt §1 and $2 a r e show ing a tr e n d upw ard. The r a t i o was h ig h i n 19 3 8 , d e c r e a s e d somewhat d u rin g th e e a r l y 1 9 4 0 's and h a s b een in c r e a s i n g s in c e t h a t ' tim e .

The i n d u s t r y r a t i o ' s f o r C h a r ts #1

and 2 a r e 2 .9 1 and 3 .0 1 r e s p e c t i v e l y . C h a rt $3 shows a d i r e c t c o r r e l a t i o n betw een th e r a t i o w ith th e s i z e o f th e company. o f 1 .8 4 .

C o n s o lid a te d h a s a r a t i o o f 3 .4 1 and M ersey h a s a r a t i o

The i n d u s t r y r a t i o i s 2 .7 3 .

The o v e r a l l i n d u s t r y r a t i o i s 2 .8 8 .

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24

12.

Met P r o f i t to N et W orth - HP/NW

I t i s c l e a r t h a t th e r a t i o o f r e t u r n on th e c a p i t a l and s u r p lu s a f f o r d s an in d e x o f th e p r o f i t a b l e n e s s o f th e in v e s te d c a p i t a l e x c lu d in g fu n d ed d e b t.

T h is i s som etim es c a l l e d th e r a t i o o f e a r n in g s to i n v e s t ­

m ent . , S in c e 19 3 8 , t h i s r a t i o h a s b een s t e a d i l y

in c r e a s i n g eac h y e a r w ith

th e e x c e p tio n o f 1942.

H ence, a l l com panies hav e b een im p ro v in g t h e i r

f i n a n c i a l p e rfo rm a n c e .

T h is i s shown i n C h a rts # 1 , w here th e r a t i o h as

in c r e a s e d from a lo w o f .0 0 5 to a h ig h o f .3 3 w ith i n d u s t r y a v e ra g e o f 1 .0 8 . C h a rt §2 i s v e ry s i m i l a r to C h a rt # 1 , c o v e rin g low o f .0 0 4 to h ig h o f .3 0 9 w ith i n d u s t r y a v e ra g e a t .1 0 6 .

An i n s p e c t i o n o f C h a r ts #29 to 33

i n d i c a t e s t h a t th e l a r g e r com panies have f a r e d somevfhat b e t t e r e x c e p t i n 1938

and 1939. C h a rt #3 i n d i c a t e s th e above a s w e ll .

C o n s o lid a te d c o m p o site

e le v e n y e a r r a t i o was .2 9 w h ile M ersey had th e lo w a v e ra g e o f .0 6 2 .

The

i n d u s t r y was a t .1 2 . The

o v e r a l l i n d u s t r y a v e ra g e i s .1 1 .

G h art #5 i n d i c a t e s c o n s id e r a b le change i n th e ra n g e . C h a rt #4 i n d i c a t e s t h a t f o r t h e i t h r e e : d i f f e r e n t m ethods o f o b ta in in g th e i n d u s t r y a v e ra g e , t h i s r a t i o i s th e o n ly one o f th e t h i r t e e n w here th e r e s u l t s o b ta in e d do n o t d i f f e r . 13.

Met P r o f i t and T axes to Met W orth - HP + Taxes/MW

T h is r a t i o i s s i m i l a r i n n a t u r e to N et P r o f i t to N e t W orth, b u t i n d i c a t e s m ore c l o s e l y t h e e f f i c i e n c y w ith w hich th e com panies hav e u se d

R ep ro d u ced with p erm ission o f th e copyright ow ner. Further reproduction prohibited w ithout perm ission.

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