Problems 1 and 2

BALANCE SHEET 2015

Assets
Cash and Equivalents $ 237,500.00
Accounts Receivable $ 592,500.00
Inventory $ 607,500.00
Total Current Assets $ 1,437,500.00
Gross Fixed Assets $ 1,250,000.00
Less Accumulated Depreciation $ 187,500.00
Net Fixed Assets $ 1,062,000.00
Total Assets $ 2,500,000.00

Liabilities and Equity

Current Liabilities
Accounts Payable $ 222,500.00
Notes Payable $ 422,500.00
Accruals $ 217,500.00
Total Current Liabilities $ 862,500.00
Long Term Debt $ 470,000.00
Total Liabilities $ 1,332,500.00
Stockholder's Equity
Common Stock $ 637,500.00
Retained Earnings $ 530,000.00
Total Stockholders Equity $ 1,167,500.00
Total Liabilities & Equity $ 2,500,000.00

INCOME STATEMENT OCF - net fixed asset investment* - net current asset investment**
Sales Revenue $ 3,360,000.00
Cost of Sales $ 2,724,960.00
Gross Profits $ 635,040.00

Less: Operating Expenses 325440

Selling Expense $ 251,200.00
General S&A $ 163,200.00
Depreciation $ 48,000.00
Total Operating Expenses $ 462,400.00

Total Operating Profit $ 172,640.00

Less: Interest Expense $ 31,200.00
Net Profits Before Taxes $ 141,440.00
Less Taxes (40%) $ 56,576.00
Net Profits After Taxes $ 84,864.00
LIQUIDITY RATIOS 2013 2014 2015 Industry Average
Current Ratio 1.5 1.7 1.7 1.6
Quick Ratio 0.9 1 1.0 0.9
Operating Cash Flow n/a n/a n/a

ASSET MANAGEMENT RATIOS 2013 2014 2015 Industry Average

Inventory Turnover 6 5 4.5 8.4
Average Collection Period 40 50 64.4 40
Fixed Asset Turnover n/a n/a
Total Asset Turnover 1.5 1.5 1.3 1.75

DEBT MANAGEMENT RATIOS 2013 2014 2015 Industry Average

Debt Ratio 60% 56% 53% 50%
Times Interest Earned 2.5 3.5 5.5 4

PROFITABILITY RATIOS 2013 2014 2015 Industry Average

Gross Profit Margin 20% 19.70% 18.90% 20%
Operating Profit Margin 4.70% 4.80% 5.14% 6%
Net Profit Margin 2% 2.30% 2.53% 3%
Return on Investment 3.00% 3.50% 6.91% 5.25%
Return on Equity 7.50% 7.95% 7.27% 10.50%
End of worksheet
ndustry Average

ndustry Average

ndustry Average

ndustry Average
INSTRUCTIONS: Analyze the firm's performance from both time-series and cross-sectional points of view using the key
financial ratios provided.

PROVIDE YOUR WRITTEN ANALYSIS IN THIS COLUMN.

Answer:
Time series analysis is used to evaluate the performace of an organization keeping it own perormance as a benchmark,
whereas cross-sectional points is used to evaluate the peformance of an organization using the external benchmarks such
as industry standards or competitors performance.

The ratios used here to evaluate the performance of the company are broadly classified into 4 categories which are
Liquidity ratios, Asset management ratios, Debt management ratios and Profitability ratios.

Using Time series approach to evalute the peformance of the organization:

The liquidity ratios of company tells about the liquidity position of an organization which is primarily evaluated using the
capital structure. In current situation the liquidity position of the company has remained steady during last three years and
there is no significant change in it.
The Asset management ratios of company tells about how efficiently their assets are being utilized, higher the asset
management ratio better it is. In present case the inventory turnover ratio of the company has gone down as compared to
last year which means the level of inventory is proportionately higher than last year’s inventory in relations to the sales
revenue earned for both the years.

The debt management ratios of company tells about the capital structure and liquidity status. In present case the debt ratio
has been falling for last three years and the times interest earned ratio is increasing at the same time which indicates that
organization is doing well in terms of liquidity.

Lastly the profitability ratios of a company tells about how profitable an organization is. In present case the Gross margin
ratio of the company has fallen by approximately 1% but still the net profit margin and the operation profit margin has
increased which means the company has been managing their operating expenses well.

Using Time series approach to evalute the peformance of the organization:

Liquidity ratios: In current situation the liquidity position of the company is neither better neither worse in comparison to
the industry benchmark. Currently the debt ratio of company is very close to the industry benchmark.

In present case the inventory turnover ratio of the company is poor as compared to the industry benchmark. Inventory
turnover ratio of the company is poor in comparison to the industry benchmark to the extent of 100% approximately, on
the other hand the average collection period is also more than the industry average.

In present case the debt ratio of the company is little worse than the industry average, but the difference between the
industry standard and the company debt ratio is not high.

Like debt management ratios profitability ratios are also close to the industry average but are little works than the industry
average.
Problem 3
INSTRUCTIONS: Calculate the operating cash flow based on your review of the firm's
income statement.

• How does operating cash flow (OCF) compare to free cash flow (FCF)?
• Why is the free cash flow so meaningful to management and investors?

= [EBIT ´ (1 - T)] + depreciation

OCF

EBIT = EARNINGS BEFORE INTEREST AND TAXES

T = TAX RATE

FCF = OCF - net fixed asset investment* - net current asset investment**
PLEASE PROVIDE YOUR ANSWERS HERE.
Operating Cash flow = (462400*(1-40%))+48000
Operating Cash flow = $325,440

Operating cash flow and free cash flow are both important factors considered by investors before
investing in any organization. Free cash flow is a measure of financial performance which reflects
the amount of earnings available to all the investors for the pupose of distribution after making all
the investments, whereas operating cash flows shows the amount of funds available for
distribution before any investments is made.

The reason why free cash flow is so meaningful to management and investors is that it shows the
real picture as to the amount of funds available for distribution to them and investments made by
the company for the future of the company.
Problem 4
INSTRUCTIONS: Calculate the sustainable growth rate based on your calculations of return on equity (ROE) and assuming a 60
increase its sustainable growth rate?

PLEASE PROVIDE YOUR ANSWERS HERE.

Answer

Sustainable-growth rate = ROE x (1 - dividend-payout ratio)

Sustainable-growth rate = 0.0727 x (1 - 60%)
Sustainable-growth rate = 0.0291 i.e. 2.91%

A company can improve its sustainable growth rate by following ways:

1) Reducing dividend payments

2) Increasing the proftability ratios
3) Retainning more funds and investing it back into business.
4) Leveraging upon the borrowed funds.
ations of return on equity (ROE) and assuming a 60 percent dividend-payout ratio. How can a company
Problem 5
INSTRUCTIONS: Evaluate the firm's overall financial condition and performance based on your analysis and then address these

• Is the company improving or deteriorating over this three-year period?

• How does your ratio analysis justify your interpretation?

PLEASE PROVIDE YOUR ANSWERS HERE.

Answer

Based on the overall evaluation of the firm's performance the conclusion is that the performance of the firm indicates the mix
To justify the conclusion following are the ratios which will support the claim:

1) The profitability ratios have increased over three year period.

2) The debt of the company has reduced in the capital structure.

3) The Asset turnover ratio have not been good during last three years as they have come down significanlty.

4) Liquidity ratios have remained unchanged during last three years.

 n your analysis and then address these questions:

formance of the firm indicates the mix of both deteriorating and improving results over this three-year period.

me down significanlty.