P7.19 Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack says, "Y'all can't be too careful about these things! Anytime I'm fixin' to invest in a stock, you can bet I'm gonna learn as much as I can about the company." Jack prefers to compute his own ratios even though he could easily obtain analytical reports from his broker at no cost. (In fact, Billy Bob Smith, his broker, has been volunteering such services for years.) Recently, Jack has been keeping an eye on a small chemical stock. The firm, South Plains Chemical Company, is big in the fertilizer business-which is something Jack knows a lot about. Not long ago, he received a copy of the firm's latest financial statements (summarized here) and decided to take a closer look at the company. South Plains Chemical Company Balance Sheet ($ thousands) Cash $ 1,250 Accounts receivable 8,000 Current liabilities $10,000 Inventory 12,000 Current assets 21,250 Fixed and other assets 8,750 Long-term debt Stockholders' equity Total liabilities and 8,000 12,000 Total assets $30,000 stockholders' equity $30,000 South Plains Chemical Company Income Statement ($ thousands) Sales Cost of goods sold Operating expenses Operating profit Interest expense Taxes Net profit $ 50,000 25,000 15,000 10,000 2,500 2,500 $ 5,000 Dividends paid to common stockholders ($ in thousands) Number of common shares outstanding Recent market price of the common stock $ 1,250 5 million $ 25 Questions

a. Compute the following ratios, using the South Plains Chemical Company figures. Latest Industry Averages Latest Industry Averages Liquidity Profitability

a. Net working capital N/A h. Net profit margin 8.5%

b. Current ratio 1.95 Activity i. Return on assets j. ROE 22.5% 32.2%

c. Receivables turnover 5.95

d. Inventory turnover 4.50

e. Total asset turnover 2.65 Leverage

f. Debt-equity ratio 0.45 Common Stock Ratios k. Earnings per share I. Price/earnings ratio m. Dividends per share n. Dividend yield $2.00 20.0 $1.00 2.5% g. Times interest earned 6.75 o. Payout ratio 50.0% p. Book value per share q. Price-to-book-value ratio $6.25 6.4

b. Compare the company ratios you prepared to the industry figures given in part

a. What are the company's strengths? What are its weaknesses?

c. What is your overall assessment of South Plains Chemical? Do you think Jack should con- tinue with his evaluation of the stock? Explain.