What do these ratios tell you about the companys operations

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Reference no: EM13484173 , Length: 30

All-Things Inc. manufactures a variety of consumer products. The company's founders have managed the company for thirty years and are now interested in selling the company and retiring. Trist Associates is looking into the acquisition of All-Things and has requested the company's latest financial statements and selected financial ratios in order to evaluate All-Things' financial stability and operating efficiency. The summary information provided by All-Things is presented below.

All-Things Inc

Income Statement

For the Year Ended May 31, Year 3

(in thousands)

Sales

$30,500

Expenses:


Cost of goods sold

17,600

Selling and administrative expense

3,050

Depreciation and amortization expense

1,890

Interest expense

900

Total expenses

23,440

Income before taxes

7,060

Income taxes

2,900

Net income

$ 4,160

All-Things Inc.

Comparative Statement of Financial Position

As of May 31

(in thousands)


Year 3

Year 2

Cash

$ 400

$ 500

Marketable securities

500

200

Accounts receivable, net

3,200

2,900

Inventory

5,800

5,400

Total current assets

9,900

9,000

Property, plant, and equipment, net

7,100

7,000

Total assets

$17,000

$16,000

Accounts payable

$ 3,700

$ 3,400

Income taxes payable

900

800

Accrued expenses

1,700

1,400

Total current liabilities

6,300

5,600

Long-term debt

2,000

1,800

Total liabilities

8,300

7,400

Common stock $(1 par value)

2,700

2,700

Paid-in-capital in excess of par

1,000

1,000

Retained earnings

5,000

4,900

Total stockholders' equity

8,700

8,600

Total liabilities and stockholders' equity

$17,000

$16,000

Selected Financial Ratios



Current


All-Things

Industry


Year 2

Year 1

Average

Current ratio

1.61

1.62

1.63

Acid-test ratio

0.64

0.63

0.68

Inventory turnover

3.17

3.21

3.18

Times interest earned

8.55

8.50

8.45

Debt-to-equity ratio

0.86

1.02

1.03

Required:

a. Calculate the above ratios for fiscal year Year 3 for All-Things Inc.

b. What do these ratios tell you about the company's operations and ability to take on additional debt?

c. Identify two limitations of ratio analysis.

Reference no: EM13484173

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