BA 620-GroupProject- PART 3 Only
The purpose of the third part of the comprehensive project is to use resources available to obtain industry averages for commonly used ratios. Additionally, you will compare company ratio results to industry averages.
A. Obtain the four-digit primary SIC (Standard Industrial Classification) Code and industry title for your company. Record the primary SIC code and industry title at the top of the Ratio Analysis Worksheet.
B. Obtain industry averages for commonly used ratios in the current period. Industry average information is reported by industry title or SIC code.
C. Look up the following industry-average ratios:
1. Current ratio
2. Debt ratio
3. Gross profit margin
4. Times interest earned
5. Accounts receivable turnover
6. Inventory turnover
7. Return on Sales
8. Asset Turnover
9. Return on Assets
10. Financial Leverage
11. Return on Equity Note that some industry averages may not apply to your company.
Running Head: BA620 PROBLEM 2
BA620 PROBLEM 2
BA620-Problem: Adams Stores Inc
Name
Institution
Date
Part 1: Financial Statements
A. Income Statement for 2016 and 2017
| Particulars | 2016 | Common size | 2017 | Common size |
| Revenue | ||||
| Sales | 3432000 | 100.00% | 5834400 | 100.00% |
| Total Revenues | 3432000 | 100.00% | 5834400 | 100.00% |
| Expenses | ||||
| Cost of goods sold | 2864000 | 83.45% | 4980000 | 85.36% |
| Depreciation | 18900 | 0.55% | 116960 | 2.00% |
| Interest Expenses | 62500 | 1.82% | 176000 | 3.02% |
| Other Expenses | 340000 | 9.91% | 720000 | 12.34% |
| Total Expenses | 3285400 | 95.73% | 5992960 | 102.72% |
| Net Income Before Taxes | 146600 | 4.27% | -158560 | -2.72% |
| Less taxes @40% | 58640 | 1.71% | 63424 | 1.09% |
| Net Income | 87960 | 2.56% | -95136 | -1.63% |
Statement of Retained Earnings
| Particulars | 2016 | 2017 |
| Beginning | 115808 | 203768 |
| Add: Net Income | 87960 | -95136 |
| Less: Dividends | 0 | -11000 |
| At the end | 203768 | 97632 |
B. Balance Sheet for 2016 and 2017
| Particulars | 2016 | Common Size | 2017 | Common Size |
| Assets | ||||
| Current Assets | ||||
| Cash | 9000 | 0.61% | 7282 | 0.25% |
| Short term Investments | 48600 | 3.31% | 20000 | 0.69% |
| Accounts Receivable | 351200 | 23.91% | 632160 | 21.90% |
| Inventory | 715200 | 48.69% | 1287360 | 44.60% |
| Total Current Assets | 1124000 | 76.53% | 1946802 | 67.44% |
| Fixed Assets | 491000 | 33.43% | 1202950 | 41.67% |
| Less: Accumulated Depreciation | 146200 | 9.95% | 263160 | 9.12% |
| Total Fixed Assets | 344800 | 23.47% | 939790 | 32.56% |
| Total Assets | 1468800 | 100.00% | 2886592 | 100.00% |
| Liabilities and owners Equity | ||||
| Current liabilities | ||||
| Accounts Payable | 145600 | 9.91% | 324000 | 11.22% |
| Accruals | 136000 | 9.26% | 284960 | 9.87% |
| Total Current liabilities | 281600 | 19.17% | 608960 | 21.10% |
| Long Term liabilities | ||||
| Long term debt | 323432 | 22.02% | 1000000 | 34.64% |
| Notes Payable | 200000 | 13.62% | 720000 | 24.94% |
| Total long-term liabilities | 523432 | 35.64% | 1720000 | 59.59% |
| Owner’s Equity | ||||
| Share Capital | 460000 | 31.32% | 460000 | 15.94% |
| Retained Earnings | 203768 | 13.87% | 97632 | 3.38% |
| Total Owners Equity | 663768 | 45.19% | 557632 | 19.32% |
| Total Liabilities | 1468800 | 100.00% | 2886592 | 100.00% |
C. Common-Size financial statements of income statement and Balance sheet.
D. Statement of Cash Flows
| Cash Flow Statement | 2017 |
| Particulars | Amount |
| Net Profit After Taxes | -95136 |
| Add: Non Cash Expenditure | |
| Depreciation | 116960 |
| Add: Non-Operating Expenditure | |
| Interest | 176600 |
| Change in Working Capital | |
| Increase in Accounts Receivable | -280960 |
| Increase in Accounts Payable | 178400 |
| Increase in Inventory | -572160 |
| Increase in Accruals | 148960 |
| Cash from Operating Activities | -327336 |
| Cash Flow from Investing Activities | |
| Sale of Short Term Investments | 28600 |
| Purchase of Fixed Assets | -711950 |
| Total Cash From Investing Activities | -683350 |
| Cash Flow from Financing Activities | |
| Increase in LT Debt | 676568 |
| Interest Paid | -17660 |
| Dividends Paid | -11000 |
| Notes Issued | 520000 |
| Cash flow from financing activities | 1008968 |
| Net Cash flow from all activities | -1718 |
| Add: Opening Cash | 9000 |
| Closing Cash | 7282 |
Part 2: Financial Statement Analysis
A. Ratios
| Ratio | 2016 | 2017 |
| Current Ratio
(Current Assets/Current liabilities) |
3.991 | 3.197 |
| Quick Ratio
{(Current assets-stock)/Current liabilities} |
1.452 | 1.083 |
| Inventory turnover (Times)
(Cost of Goods Sold/ Average Inventory) |
4.004 | 4.974 |
| Average collection period (days)
(365/Debtor’s turnover ratio) |
37.351 | 30.759 |
| Total asset turnover (times)
(sales/total assets) |
2.337 | 2.021 |
| Debt Ratio
(Debt/(Debt + Equity)) |
0.441 | 0.755 |
| Times interest earned
(Earnings Before Interests and Taxes(EBIT)/Interest) |
3.346 | 0.099 |
| Gross Profit Margin
(Gross Profits/Sales) |
0.166 | 0.146 |
| Net profit margin
(Net Profit/Sales) |
0.026 | -0.016 |
| Return on Assets
(EBIT/Total Assets) |
0.142 | 0.006 |
| Return on equity
(Net Income/ Owners Equity) |
0.133 | -0.171 |
| P/E Ratio Return on equity
(Market Price/Earnings per Share |
9.663 | -6.307 |
EBIT = Sales- Cost of Goods Sold – Depreciation -Other Expenses.
For 2016, EBIT is 209100 while that of 2017 is 17440.
Return on Equity using DU Point Analysis
| Particulars | 2016 | 2017 |
| Net Profit Margin (NPM) | 0.026 | -0.016 |
| Asset turnover (AT) | 2.337 | 2.021 |
| Financial Leverage (FL) | 2.213 | 5.177 |
| Return on Equity (NPM*AT*FL) | 0.134 | -0.167 |
B. Comment on the ratios
Financial ratios are important in describing the financial health of an organization at any given time. The ratios are therefore important for different organizational stakeholders. For instance, any interested investors and analysts tend to pay much attention to the price to earnings ratio, and net profit margin. The two ratios show the return rate of a company and its profitability. The two ratios were positive in 2016 and were negative in 2017. This shows that the financial health of the company deteriorated in the year 2017.
Current ratio is used to understand the liquidity of a company. The current ratio enables the company to pay the debts at ease, as compared to when there is a low current ratio. The company reduced its current ratio for the year 2017 as compared to 2016. Quick ratio subtracts the inventories from the current assets and divides the difference with liabilities. The quick ratios for the company were high in both years. This implies that the company tend to turn their inventories quite slower, which is a threat to the company.
Return on equity enables the organizational shareholders to understand the profitability of their capital as they invest in the company. A high ROE indicates that the organization is capable of generating high levels of profit. Debt-Equity ratio is another important ratio that shows the prospective investors how much the company is likely to borrow. A high debt-equity ratio reduces the safety margin of the investors and vice versa.
C. Compare 2017 ratios with the industry average.
The ratios in 2017 implies that the financial performance of the company had deteriorated. This implies that the company competitors had a higher competitive advantage, which is a threat to the company. Comparing the ratios with the performance of the industry at that time, we could conclude that the financial performance of the company was low.
Part 3: Break even analysis, Financial and Operating Leverages
a. Break-even in dollars and units
Break-even units = fixed cost / contribution per unit
Contribution per unit = Sales per unit – variable cost per unit = 50 – 25 = 25
Break even units = 600000 / 25 = 24000 units
Break even in dollars = 24000 * 50 = 1200000
These numbers mean that the company needs to sell a minimum of 24000 units so as to earn profits and also prevent losses. As a manager, I would use the numbers in financial planning to help in defining minimum sales target of 1200000 and hence minimize losses.
b. Degree of financial leverage
Degree of financial leverage = EBIT / EBT
EBIT (earnings before interest and tax) = 400000
EBT (earning before tax) = 280000
Degree of financial leverage = 400000/280000 = 1.43
This means that for any 1% variation in EBIT, EBT changes by 1.43%. This is important in financial planning especially for the reason that it aids in establishing the capital structure. For instance, the degree of financial leverage more than 1 is good is the operating profit increases especially for the reason that interests are fixed expenses and a rise in operating profit increases the net income and EPS. Hence, financial leverage can be reduced to 1 through the use of capital investment debt.
c. Degree of operating leverage
Degree of operating leverage = Contribution / EBIT
= (2000000-1000000) / 4000000 = 2.5
This means that for every 1% change in sales, there is a 2.5% change in profit. In financial planning, the number is important in making decisions regarding the minimum sales and the amount of sales that ought to be increased without varying the fixed costs.
