Strong Tie Case Study

Profitability Profitability is vital to a company and can be measuring using a number of different profitability ratios. Strong Tie should be aware of where its’ profitability levels as it is an indicator of the firm’s value. Strong Tie’s gross profit margin is steadily decreasing and below industry average. This means that Strong Tie is not generating as much revenue in comparison with its cost of goods sold. Operating profit margin helps to identify how much profit remains after all operating expense have been eliminated from sales. This ratio has significantly declined over the past three years and its extremely below industry average, thus should be a big concern for the company.

Liquidity

To better understand liquidity as well as the

Total asset turnover ratio helps to show if the company’s assets are helping to encourage sales revenue, thus a high asset turnover ratio implies good use of assets in promoting revenue. Not only is Strong Tie’s total asset turnover decreasing, as of 2008 it is below the industry average by around 40%. Strong Tie fixed asset turnover is also diminishing and well below the industry average. It is important to acknowledge that Strong Tie has been investing a lot into factory automation which means an increase in assets, thus lowering turnover ratios. This might be lowering rates now, but has potential to reduce labor costs and speed up design which are all influential factors in the company’s strategic planning. The last three profitability ratios consist of net profit margin, return on assets, and return on equity. All three of these ratios are diminishing at an alarming rate and below the industry average. Improving profitability should be Strong Tie’s main

This will help to reduce the cost of goods sold, thus increasing Strong Tie’s gross margin and operating margin. Strong Tie should look into other suppliers and identify more efficient manufacturing methods. Improving labor costs will also help to increase margins, which is already a plan being implemented by Strong Tie. Increasing sales would be instrumental for increasing Strong Tie’s profitability which can be accomplished in multiple ways. For the sake of Strong Tie, the company should look into either concentrating its sales efforts or expanding their market.

Liquidity recommendations include increasing net sales and preventing further decline in current and cash ratio. Even though the current ratio is declining from previous years and below the industry’s average. The 3.13 current ratio value implies that Strong Tie could pay all its short-term debts by liquidating roughly a third of their current assets. Preventing decline will help the firm meet its short term obligations. It is also crucial to improve liquidity for the sake of company loans which require that Strong Tie maintain or exceed certain