Calculate firm profitability ratios

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Reference no: EM131441487

Question: Gardems was recently hired as a financial analyst by Taylor, Inc., which is a Pennsylvania based company. His first task is to conduct a financial statement analysis of firm covering the past 2 years.

Balance Sheets

2012

2011

Cash

$52,000

57,600

Accounts receivable

402,000

351,200

Inventory

836,000

715,200

Total current assets

$1,290,000

$1,124,000

 

 

 

Gross fixed assets

$527,000

$491,000

Less:  Accumulated depreciation

166,200

146,200

Net fixed assets

$360,800

344,800

Total assets

$1,650,800

$1,468,800

 

 

 

Accounts payable

$175,200

$145,600

Notes payable

225,000

200,000

Accruals

140,000

136,000

Total current liabilities

$540,200

$481,600

Long-term debt

424,612

$323,432

Common stock

460,000

460,000

Retained earnings

225,988

203,768

Total equity

$685,988

$663,768

Total Claims

$1,650,800

$1,468,800

 

 

 

INCOME STATEMENTS

 

 

Sales

$3,850,000

$3,432,000

Cost of goods sold

3,250,000

2,864,000

Other expenses

430,300

340,000

Depreciation

20,000

18,900

EBIT

$ 149,700

$209,100

Interest expense

76,000

62,500

EBT

$73,700

146,600

Taxes (40%)

29,480

58,640

Net income

$44,220

$87,960

 

 

 

OTHER DATA

 

 

December 31 stock price

$6.00

$8.50

Number of shares outstanding

100,000

100,000

Dividend per share

$0.22

$0.22

Annual lease payment

$40,000

$40,000

Earnings per share

$0.442

$0.880



Gardems also developed the following industry average data for 2012:

Ratio                       

Industry Average

Current

2.7

Quick

1.0

Inventory Turnover

7.0

Days sales outstanding (DSO)

32.0 days

Fixed asset turnover

10.7

Total asset turnover

2.6

Debt ratio

50.0%

Times Interest Expense

2.5

Profit margin

3.5%

Basic earning power

19.1%

ROA

9.1%

ROE

18.2%

P/E

14.2

How should Gardems interpret this financial information?

Gardems is thinking along the following lines on this case

a. Prepare an executive summary of your findings.

b. Prepare a statement of cash flows for the firm for 2012.

c. Assess the firm's liquidity position.

d. How do the firm's asset management ratios stack up against the industry averages?

e. Calculate firm's profitability ratios.

f. Apply the Du Pont analysis to 2012 and 2011 data to obtain a general overview of the firm's financial
condition.

Gardems thinks that financial statement analysis can provide some useful information concerning a company's operations and financial conditions, yet it does have some inherent problems and limitations that necessitate care and judgement. Discuss the most important of these problems and limitations.

Reference no: EM131441487

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