Ratios A) Protek Is in Essay

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The strong declining trends -- especially in the cash conversion cycle and in liquidity -- are cause for concern because those trends are leading to disaster within a year or two. That the company has gone from being about average in its industry for financial performance to generally underperforming the industry is also cause for significant concern. A deterioration in financial condition vs. its peers indicates that Protek's problems are firm-specific, not attributable to general industry weaknesses or the business cycle.

This is critical because although the company has seen its ROE and ROA increase, this should result in an improved financial condition. Thus, while the company is doing some things right, it has not been able to translate such minor successes into significant financial condition improvements. Protek's financial condition is not as good as it should be, given recent margin and ROE/ROA improvements.

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b) The DuPont ratio is based on the premise that the ROE is impacted by operating efficiency, asset efficiency and financial leverage. The formula is ROE = profit margin * total asset turnover * equity multiplier. It shows which factors are responsible for the change in the ROE. For Protek, the ROE is 18.76% in 2008, an improvement from 7.42% in 2006.

The improvement in the ROE for Protek in 2008 reflects two factors -- the company's improved profit margins and its higher degree of leverage. The debt-to-equity ratio is significantly higher, and this means that the impact of other changes in the DuPont calculation will be amplified compared to previous years. The company's improved margins, therefore, are reflected in a strongly-improved ROE.

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