Case Study on Danhart Plumbing company.

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5. Danhart Plumbing is a small manufacturer of plumbing supplies located
in Toronto, Canada. It is in a highly competitive industry and therefore
must maintain an aggressive marketing posture to survive.
Danhart Plumbing is a small manufacturer of plumbing supplies located
in Toronto, Canada. It is in a highly competitive industry and therefore
must maintain an aggressive marketing posture to survive.

6. The firm’s board of directors will elect a new president, Robert Denhart.
Robert Denhart is concerned about the future of Denhart Plumbing.
Although sales rose slightly between 1988 and 1989, after tax profits
declined substantially. He also wants to be able to explain to the board
why profits have declined. He focused on the number of shares
outstanding, dividend payout and growth and ratio analysis of Danhart
plumbing.
The firm’s board of directors will elect a new president, Robert Denhart.
Robert Denhart is concerned about the future of Denhart Plumbing.
Although sales rose slightly between 1988 and 1989, after tax profits
declined substantially. He also wants to be able to explain to the board
why profits have declined. He focused on the number of shares
outstanding, dividend payout and growth and ratio analysis of Danhart
plumbing.

7. • Robert learned that the firm’s stock sold for $18 a share at the
end of 1988 and $22 a share at the end of 1989. The
accounting department had omitted the number of shares
outstanding and the 1989 dividends from the working papers
provided to him. We have to find out the amount of dividend
given to stockholder in 1989 as well as the number of shares
outstanding. Besides we need to analyze the financial
condition of Danhart plumbing. Ratio analysis will indicate
whether the Danhart Plumbing is a strong firm in this industry
as well as possible problem areas.

8. • What is the number of shares outstanding? How
much did Denhart Plumbing pay in cash dividends
in 1989?
• Is Danhart Plumbing is a strong firm in this
industry?
• Do any of its Ratios indicate possible problem
areas?
• Do the changes in ratios from 1988 to 1989 offer
evidence that the firm is growing stronger or
weaker? Which Ratios give this information?

9. • Number of shares outstanding:
• Stocks can be two types- common stock and preffered stock. Danhart plumbing
company includes only common stock. In it’s balance sheet the amount of common
stock($1 par) is $10000. So the number of shares outstanding will be 10000.
• Dividends paid in 1989:
• In 1989 Danhart plumbing company’s net income was $10560.Generally a firm
produces its cashflows from its operation. After meeting all its financial obligation it
has earnings available to shareholders, which is called retained earnings.
• Now this retained earnings can be distributed to shareholders or it can be reinvested
in the potential projects .if it is distributed to shareholder then it is called dividend.
• In 1989 Danhart plumbing company’s retained earnings increased from $10957 to
$15780.
• Dividends paid in 1989 is= 10560-4823
=$5737

10. Danhart plumbing (Ratio Analysis)
1989 1988
current ratio 1.48 2.38
Acid test 0.63 1.21
Accounts receivable turnover 16.56 28.00
Inventory turnover 5.18 6.80
profit margin 14.17% 16.41%
Gross profit margin 41.33% 39.72%
Asset turnover 1.48 1.79
Return on investment 21.04% 29.34%
Return on Equity 36.69% 47.96%
Times interest earned 18.45 16.19
price-earnings ratio 20.83 15.67
Debt equity ratio 0.74 0.63
Dividend payout 54.33% 39.16%
Dividend yield 2.61% 2.50%
Earnings per share 1.056 1.149
Dividend per share 0.5737 0.45

11. Interpretation: Plumbing-supply industry Averages for current ratio is 1.4. In 1989
current ratio was 1.48 and in 1988 it is 2.38 Both are higher than Plumbing-supply
industry Average. If we compare the time series than current ratio in 1989 is lower
than1988.
Interpretation: Plumbing-supply industry Averages for current ratio is 1.4. In 1989
current ratio was 1.48 and in 1988 it is 2.38 Both are higher than Plumbing-supply
industry Average. If we compare the time series than current ratio in 1989 is lower
than1988.
Interpretation: Plumbing-supply industry Averages for acid test ratio is 0.9. In 1989
acid test ratio was 0.63and in 1988 it is 1.21. In 1988 acid test ratio is higher than
Plumbing-supply industry Average. But in 1989 it is lower than averages which means
that the company has liquidity crisis. If we compare the time series than acid test
ratio in 1989 is lower than1988.
Interpretation: Plumbing-supply industry Averages for acid test ratio is 0.9. In 1989
acid test ratio was 0.63and in 1988 it is 1.21. In 1988 acid test ratio is higher than
Plumbing-supply industry Average. But in 1989 it is lower than averages which means
that the company has liquidity crisis. If we compare the time series than acid test
ratio in 1989 is lower than1988.

12. Interpretation: Plumbing-supply industry Averages for Accounts Receivable
Turnover Ratio is 8 times. In 1989 Accounts Receivable Turnover Ratio was 16.56
times and in 1988 it was 28 times Both are higher than Plumbing-supply industry
Average. If we compare the time series than current ratio in 1989 is lower than1988.
Interpretation: Plumbing-supply industry Averages for Accounts Receivable
Turnover Ratio is 8 times. In 1989 Accounts Receivable Turnover Ratio was 16.56
times and in 1988 it was 28 times Both are higher than Plumbing-supply industry
Average. If we compare the time series than current ratio in 1989 is lower than1988.
Interpretation: Plumbing-supply industry Averages for Inventory Turnover Ratio is
5 times. In 1989 Inventory Turnover Ratio was 5.18 times and in 1988 it was 6.80
times Both are higher than Plumbing-supply industry Average. If we compare the
time series than Inventory Turnover Ratio in 1989 is lower than1988 which
indicates inefficiency in controlling inventory levels.
Interpretation: Plumbing-supply industry Averages for Inventory Turnover Ratio is
5 times. In 1989 Inventory Turnover Ratio was 5.18 times and in 1988 it was 6.80
times Both are higher than Plumbing-supply industry Average. If we compare the
time series than Inventory Turnover Ratio in 1989 is lower than1988 which
indicates inefficiency in controlling inventory levels.

13. Interpretation: Plumbing-supply industry Averages for Profit Margin Ratio is 16%.In
1989 Profit Margin Ratio was 14.17% and in 1988 it was 16.41%. In 1988 Profit Margin
Ratio is higher than Plumbing-supply industry Average and in 1989 profit margin
reduced. If we compare the time series than Inventory Turnover Ratio in 1989 is lower
than1988 which indicates net profitability reduced.
Interpretation: Plumbing-supply industry Averages for Profit Margin Ratio is 16%.In
1989 Profit Margin Ratio was 14.17% and in 1988 it was 16.41%. In 1988 Profit Margin
Ratio is higher than Plumbing-supply industry Average and in 1989 profit margin
reduced. If we compare the time series than Inventory Turnover Ratio in 1989 is lower
than1988 which indicates net profitability reduced.
Interpretation: Plumbing-supply industry Averages for Gross Profit Margin Ratio is
30%.In 1989 Gross Profit Margin Ratio was 41.33% and in 1988 it was 39.72%. In 1989
Gross Profit Margin Ratio is higher than Plumbing-supply industry Average and in
1988 Gross Profit Margin reduced than average. If we compare the time series than
Gross Profit Margin Ratio in 1989 is higher than1988 which indicates gross
profitability increased.

14. Interpretation: Plumbing-supply industry Averages for Asset Turnover Ratio is 1.3
times. In 1989 Asset Turnover Ratio was 1.48 times and in 1988 it was 1.79 times In
1989 & 1988 Asset Turnover Ratio is higher than Plumbing-supply industry Average. If
we compare the time series than Asset Turnover Ratio in 1989 is lower than1988 which
indicates the company is not using its assets optimally.
Interpretation: Plumbing-supply industry Averages for Asset Turnover Ratio is 1.3
times. In 1989 Asset Turnover Ratio was 1.48 times and in 1988 it was 1.79 times In
1989 & 1988 Asset Turnover Ratio is higher than Plumbing-supply industry Average. If
we compare the time series than Asset Turnover Ratio in 1989 is lower than1988 which
indicates the company is not using its assets optimally.
Interpretation: Plumbing-supply industry Averages for Return on investment Ratio is
25%.In 1989 Return on investment Ratio was 21.04% and in 1988 it was 29.34% .In 1988
Return on investment Ratio is higher than Plumbing-supply industry Average but lower
in 1989.If we compare the time series than Return on investment Ratio in 1989 is lower
than1988 which indicates the inefficiency of investment.
Interpretation: Plumbing-supply industry Averages for Return on investment Ratio is
25%.In 1989 Return on investment Ratio was 21.04% and in 1988 it was 29.34% .In 1988
Return on investment Ratio is higher than Plumbing-supply industry Average but lower
in 1989.If we compare the time series than Return on investment Ratio in 1989 is lower
than1988 which indicates the inefficiency of investment.

15. Interpretation: Plumbing-supply industry Averages for Return on Equity Ratio is
10%.In 1989 Return on Equity Ratio was 36.69% and in 1988 it was 47.96% .In 1988
Return on Equity Ratio is higher than Plumbing-supply industry Average but lower in
1989.If we compare the time series than Return on Equity Ratio in 1989 is lower
than1988 which indicates company is inefficient in generating income on new
investment.
Interpretation: Plumbing-supply industry Averages for Return on Equity Ratio is
10%.In 1989 Return on Equity Ratio was 36.69% and in 1988 it was 47.96% .In 1988
Return on Equity Ratio is higher than Plumbing-supply industry Average but lower in
1989.If we compare the time series than Return on Equity Ratio in 1989 is lower
than1988 which indicates company is inefficient in generating income on new
investment.
Interpretation: Plumbing-supply industry Averages for Times Interest Earned Ratio is
12.In 1989 Times Interest Earned Ratio was 18.45 and in 1988 it was 16.19. In 1989
and 1988 Times Interest Earned Ratio is higher than Plumbing-supply industry
Average.If we compare the time series than Times Interest Earned ratio in 1989 is
higher than1988 which indicates the firm has just enough to pay off its interest
expense.
Interpretation: Plumbing-supply industry Averages for Times Interest Earned Ratio is
12.In 1989 Times Interest Earned Ratio was 18.45 and in 1988 it was 16.19. In 1989
and 1988 Times Interest Earned Ratio is higher than Plumbing-supply industry
Average.If we compare the time series than Times Interest Earned ratio in 1989 is
higher than1988 which indicates the firm has just enough to pay off its interest
expense.

16. Interpretation: Plumbing-supply industry Averages for Price/Earnings Ratio is 14.In
1989 Price/Earnings Ratio was 20.83 and in 1988 it was 15.67. In 1989 and 1988
Price/Earnings Ratio is higher than Plumbing-supply industry Average. If we compare
the time series than Price/Earnings Ratio in 1989 is higher than1988 which indicates
the current stock price is increasing
Interpretation: Plumbing-supply industry Averages for Price/Earnings Ratio is 14.In
1989 Price/Earnings Ratio was 20.83 and in 1988 it was 15.67. In 1989 and 1988
Price/Earnings Ratio is higher than Plumbing-supply industry Average. If we compare
the time series than Price/Earnings Ratio in 1989 is higher than1988 which indicates
the current stock price is increasing
Interpretation: Plumbing-supply industry Averages for Debt-to-Equity Ratio is
0.55.In 1989 Debt-to-Equity Ratio was 0.74 and in 1988 it was 0.63. In 1989 and
1988 Debt-to-Equity Ratio is higher than Plumbing-supply industry Average which
means the firm is depending on more debt. If we compare the time series than
Debt-to-Equity Ratio in 1989 is higher than1988 which indicates the firms risk is high.
Interpretation: Plumbing-supply industry Averages for Debt-to-Equity Ratio is
0.55.In 1989 Debt-to-Equity Ratio was 0.74 and in 1988 it was 0.63. In 1989 and
1988 Debt-to-Equity Ratio is higher than Plumbing-supply industry Average which
means the firm is depending on more debt. If we compare the time series than
Debt-to-Equity Ratio in 1989 is higher than1988 which indicates the firms risk is high.

17. Interpretation: Dividend payout ratio judges the amount of dividend in relation to
the company's earnings for the period. Plumbing-supply industry Averages for
Dividend Payout Ratio is 25%.In 1989 Dividend Payout Ratio was 54.33% and in
1988 it was 39.16%. In 1989 and 1988 Dividend Payout Ratio is higher than
Plumbing-supply industry Average which means the firm is paying more dividend. If
we compare the time series than Dividend Payout Ratio in 1989 is higher than1988
which indicates the firm can reinvest less amount in other project.
Interpretation: Dividend payout ratio judges the amount of dividend in relation to
the company's earnings for the period. Plumbing-supply industry Averages for
Dividend Payout Ratio is 25%.In 1989 Dividend Payout Ratio was 54.33% and in
1988 it was 39.16%. In 1989 and 1988 Dividend Payout Ratio is higher than
Plumbing-supply industry Average which means the firm is paying more dividend. If
we compare the time series than Dividend Payout Ratio in 1989 is higher than1988
which indicates the firm can reinvest less amount in other project.

18. Interpretation: Dividend yield ratio provides a comparison of amount of dividend in
relation to investment needed to purchase its share. Plumbing-supply industry
Averages for Dividend Yield Ratio is 3%.In 1989 Dividend Yield Ratio was 2.61% and in
1988 it was 2.50%. In 1989 and 1988 Dividend Yield Ratio is lower than Plumbing-
supply industry Average which means the firm’s growth rate is lower than averaged. If
we compare the time series than Dividend Yield Ratio in 1989 is higher than1988
which indicates the firms growth rate is gradually increasing.
Interpretation: Dividend yield ratio provides a comparison of amount of dividend in
relation to investment needed to purchase its share. Plumbing-supply industry
Averages for Dividend Yield Ratio is 3%.In 1989 Dividend Yield Ratio was 2.61% and in
1988 it was 2.50%. In 1989 and 1988 Dividend Yield Ratio is lower than Plumbing-
supply industry Average which means the firm’s growth rate is lower than averaged. If
we compare the time series than Dividend Yield Ratio in 1989 is higher than1988
which indicates the firms growth rate is gradually increasing.
After calculating the ratio analysis we found current ratio, Accounts receivable
turnover, Inventory turnover, Gross profit margin, Asset turnover, Return on Equity,
Times interest earned, price-earnings ratio, Debt equity ratio, Dividend payout are
higher than Plumbing-supply industry Averages for financial ratio in 1989.But these
ratio Acid test, profit margin, Return on investment, Dividend yield are lower than
Plumbing-supply industry Averages for financial ratio. Overall Danhart Plumbing is a
strong firm in this industry.

19. • Here are some possible problem area that are identified from ratio analysis:
Ratio 1989 1988
Acid test 0.63 1.21
Profit margin 14.17%
16.41
%
Return on investment 21.04%
29.34
%
Debt equity ratio 0.74 0.63
Dividend payout 54.33%
39.16
%
Dividend yield 2.61% 2.50%

20. • When we are considering the year of 1989 the firm’s have liquidity crisis.
Profit margin is lower than Plumbing-supply industry Averages for
financial ratio although the gross profit margin increased. Return on
investment is also lower than industry averages. Moreover the firm is more
reliable on debt rather than equity. The dividend payout ratio is higher so
the firm can reinvest its net income less in other sector. Last of all dividend
yield ratio is lower than expectation and it has an effect on the current
stock price.
Possible problem areas:

21. • These are the changes in ratios from 1988 to 1989 offer evidence that the
firm is growing weaker. When we are comparing the ratio of 1989 with the
ratio of 1988 we found the firm have liquidity crisis. In 1989 acid test ratio
decreased 1.21 to 0.63. Accounts receivable turnover is also decreased 28
times to 16.56 times. Inventory turnover is also decreased 6.80 to 5.18
times. profit margin is also decreased 16.41% to 14.17%.Asset turnover
ratio, Return on investment, Return on Equity decreased. Debt equity ratio
increased which means the firm is more reliable to debt.
• The dividend payout ratio is higher so the firm can reinvest its net income
less in other sector.
4. The firm is growing weaker:

22. These Ratios give this information that the firm is growing weaker
Danhart plumbing (Ratio Analysis)
1989 1988
current ratio 1.48 2.38
Acid test 0.63 1.21
Accounts receivable turnover 16.56 28.00
Inventory turnover 5.18 6.80
profit margin 14.17% 16.41%
Asset turnover 1.48 1.79
Return on investment 21.04% 29.34%
Return on Equity 36.69% 47.96%
Debt equity ratio 0.74 0.63
Dividend payout 54.33% 39.16%

23.
STRENGTHS
Their sales are slightly increasing
Skilled labor force
Stock price is increasing year to year
WEAKNESSES
Danhart plumbing is a small manufacturer of plumbing supplies
Their net operating income is gradually decreasing.
OPPORTUNITIES
Dividend policy
Dividend expectation of stockholder
THREATS
It is in a highly competitive industry
It must maintain an aggressive marketing posture to survive.
STRENGTHS
Their sales are slightly increasing
Skilled labor force
Stock price is increasing year to year
WEAKNESSES
Danhart plumbing is a small manufacturer of plumbing supplies
Their net operating income is gradually decreasing.
OPPORTUNITIES
Dividend policy
Dividend expectation of stockholder
THREATS
It is in a highly competitive industry
It must maintain an aggressive marketing posture to survive.

24. Findings:
After calculating the ratio analysis we found current ratio, Accounts receivable
turnover, Inventory turnover, Gross profit margin, Asset turnover, Return on
Equity, Times interest earned, price-earnings ratio, Debt equity ratio, Dividend
payout are higher than Plumbing-supply industry Averages for financial ratio in
1989.But these ratio Acid test, profit margin, Return on investment, Dividend
yield are lower than Plumbing-supply industry Averages for financial ratio.
Overall Danhart Plumbing is a strong firm in this industry.
Although the firm is strong in the industry gradually the firm is growing weaker
at the time of comparing the financial condition of 1989 to 1988.

25. • Higher the current ratio better it is but there is a limit to this..
• A quick ratio of more than one indicates that the most liquid
assets of a business exceed its total debts.
• Accounts receivable turnover measures the efficiency of a
business in collecting its credit sales.
• Inventory turnover ratio is used to measure the inventory
management efficiency of a business.
• A lower asset turnover ratio tells that the company is not
using its assets optimally.
• Return on equity is an important measure of the profitability
of a company.
Interpretation:Interpretation:

26. Recommendation:
• The company should focus on the general and administrative expense
because it reduces the net income of the company.
• The firm should know the expectation of the shareholder as their dividend
payout ratio is high
• The firm should increase the portion of retained earnings.
Conclusion:
The firm’s stock price is gradually increasing $18 to $22.But the net operating
income is gradually decreasing. As the firm is growing weaker the new
president should change the dividend policy. The firm should try to control
their cost. The firm is relying more on debt which is highly risky.