Income Statement

20072008ESales7,035,600COGS4,980,000 5,800,000Other expenses720,000 612,960Deprec.116,960 120,000 Tot. op. costs5,816,960 6,532,960 EBIT17,440 502,640Int. expense176,000 80,000 EBT(158,560)422,640Taxes (40%)(63,424)169,056Net income(95,136)253,584

Balance Sheets: Assets

20072008ECash7,282 14,000S-T invest.20,000 71,632AR632,160 878,000Inventories1,287,360 1,716,480 Total CA1,946,802 2,680,112 Net FA939,790 836,840Total assets2,886,592 3,516,952

Balance Sheets: Liabilities & Equity

20072008EAccts. payable324,000 359,800Notes payable720,000 300,000Accruals284,960 380,000 Total CL1,328,960 1,039,800Long-term debt1,000,000 500,000Common stock460,000 1,680,936Ret. earnings97,632 296,216 Total equity557,632 1,977,152Total L&E2,886,592 3,516,952

Other Data

20072008EStock price$6.00$12.17# of shares100,000 250,000EPS-$0.95$1.01DPS$0.11$0.22Book val. per share$5.58$7.91Lease payments$40,000$40,000Tax rate0.40.4

Why are ratios useful?Standardize numbers; facilitate comparisonsUsed to highlight weaknesses and strengths

Five Major Categories of RatiosLiquidity: Can we make required payments as they fall due?Asset management: Do we have the right amount of assets for the level of sales?

Ratio Categories (Continued)Debt management: Do we have the right mix of debt and equity?Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?Market value: Do investors like what they see as reflected in P/E and M/B ratios?

Forecasted Current and Quick Ratios for 2008.

Forecasted Current and Quick Ratios for 2008.

CA26,80,112CL10,39,800Current Ratio2.577526

CA - Inventory9,63,632CL10,39,800Quick Ratio0.926747

Comments on CR and QRExpected to improve but still below the industry average.Liquidity position is weak.

2008E20072006Ind.CR2.58x1.46x2.3x2.7xQR0.93x0.5x0.8x1.0x

Inventory Turnover Ratio vs. Industry Average

Inventory Turnover Ratio vs. Industry Average

COGS58,00,000Inventory17,16,480COGS/Inventory3.379008

Comments on Inventory TurnoverInventory turnover is below industry average.Firm might have old inventory, or its control might be poor.No improvement is currently forecasted.

DSO: average number of days from sale until cash received.

DSO: average number of days from sale until cash received.

AR8,78,000Sales70,35,600Sales/day19275.62DSO45.54978

Appraisal of DSOFirm collects too slowly, and situation is getting worse.Poor credit policy.

Fixed Assets and Total AssetsTurnover Ratios

Fixed Assets and Total AssetsTurnover Ratios

Sales70,35,600Assets35,16,952Fixed Assets8,36,840Asset turnover2.000482Fixed Assets turnover8.407342

Fixed Assets and Total AssetsTurnover RatiosFA turnover is expected to exceed industry average. Good.TA turnover not up to industry average. Caused by excessive current assets (A/R and inventory).

2008E20072006Ind.FA TO8.4x6.2x10.0x7.0xTA TO2.0x2.0x2.3x2.5x

Calculate the debt, TIE, and EBITDA coverage ratios.

Calculate the debt, TIE, and EBITDA coverage ratios.

Total LiabilitiesCL10,39,800LT Debt5,00,00015,39,800Total Assets35,16,952TL/TA0.437822

Interest80,000EBIT5,02,640TIE6.283

EBITDA Coverage (EC)

EBITDA Coverage (EC)

EBITDAEBIT5,02,640Depreciation1,20,0006,22,640Interest80,000Debt Repayment0EC7.783

Debt Management Ratios vs. Industry AveragesRecapitalization improved situation,

Profit Margin (PM)Very bad in 2007, but projected to meet industry average in 2008. Looking good.

Net Income2,53,584Sales70,35,600Profitability0.036043

Basic Earning Power (BEP)

Basic Earning Power vs. Industry AverageBEP removes effect of taxes and financial leverage. Useful for comparison.Projected to be below average.Room for improvement.

EBIT5,02,640Total Assets35,16,952BEP0.142919

Return on Assets (ROA)and Return on Equity (ROE)

Return on Assets (ROA)and Return on Equity (ROE)

Net income2,53,584Total Assets35,16,952ROA0.072103

Net Income2,53,584Equity19,77,152ROE0.128257

ROA and ROE vs. Industry AveragesBoth below average but improving.

Effects of Debt on ROA and ROEROA is lowered by debt--interest expense lowers net income, which also lowers ROA.However, the use of debt lowers equity, and if equity is lowered more than net income, ROE would increase.

Explain the Du Pont SystemThe Du Pont system focuses on:Expense control (PM)Asset utilization (TATO)Debt utilization (EM)It shows how these factors combine to determine the ROE.

The Du Pont System

The Du Pont System2006:2.6% x 2.3x2.2=13.2%2007:-1.6%x2.0x5.2=-16.6%2008:3.6%x2.0x1.8=13.0%Ind.:3.6%x2.5x2.0=18.0%

Potential Problems and Limitations of Ratio Analysis?Comparison with industry averages is difficult if the firm operates many different divisions.Average performance is not necessarily good.Seasonal factors can distort ratios.

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Problems and Limitations (Continued)Different accounting and operating practices can distort comparisons.Sometimes it is difficult to tell if a ratio value is good or bad.

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Qualitative FactorsAre the companys revenues tied to a single customer?To what extent are the companys revenues tied to a single product?To what extent does the company rely on a single supplier?(More)

Qualitative Factors (Continued)What percentage of the companys business is generated overseas?What is the competitive situation?What does the future have in store?What is the companys legal and regulatory environment?