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1. Explain how the credit analyst's focus will differ from the investment analyst's focus.
2. What are the limitations of financial ratios?
3. What do liquidity ratios measure? Activity ratios? Leverage ratios? Profitability ratios? Market ratios?
4. How is the Du Pont System helpful to the analyst?
5. Eleanor's Computers is a retailer of computer products. Using the financial data pro- vided, complete the financial ratio calculations for 2013. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.
Industry Averages
Financial Ratios
2011
2012
2013
Current ratio
1.71X
1.65X
1.70X
Quick ratio
0.92X
0.89X
0.95X
Average collection period
60 days
65 days
Inventory turnover
4.20X
3.90X
4.50X
Fixed asset turnover
3.20X
3.33X
3.00X
Total asset turnover
1.40X
1.35X
1.37X
Debt ratio
59.20%
61.00%
60.00%
Times interest earned
3.70X
4.75X
Gross profit margin
25.00%
23.00%
22.50%
Operating profit margin
12.50%
12.70%
Net profit margin
6.10%
6.00%
6.50%
Return on total assets
8.54%
8.10%
8.91%
Return on equity
20.93%
20.74%
22.28%
Income Statement for Year Ended 12/31/13 Balance Sheet at 12/31/13
Sales
$1,500,000
Cash
$125,000
Cost of goods sold
1,200,000
Accounts receivable
275,000
Gross profit
$ 300,000
Inventory
325,000
Operating expenses
100,000
Current assets
$ 725,000
Operating profit
$ 200,000
Fixed assets (net)
$ 420,000
Interest expense
72,000
Total Assets
$1,145,000
Earnings before tax
128,000
Accounts payable
$ 150,000
Income tax (40%)
51,200
Notes payable
225,000
Net Income
$76,800
Accrued liabilities
Current liabilities
475,000
Long-term debt
400,000
Total liabilities
$ 875,000
Equity
270,000
Total liabilities and equity
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