BA 620-GroupProject- PART 3 Only

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.

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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.