1. Perform a common-size analysis of KPB Inc. What conclusions can you arrive at by looking at the evolving composition of both KPBs income statement and balance sheet?

2. What are some potential problems and limitations of financial ratio analysis?

2004 Table IC 4-1. Balance Sheets 2006E 2005 Assets Cash $ 85,632 $ 7,282 Accounts receivable 878,000 632,160 Inventories 1,716,480 1,287,360 Total current assets $2,680,112 $1,926,802 Gross fixed assets 1,197,160 1,202,950 Less accumulated depreciation 380,120 263,160 Net fixed assets $ 817,040 $ 939,790 Total assets $3,497,152 $2,866,592 $ 57,600 351,200 715,200 $1,124,000 491,000 146,200 $ 344,800 $1,468,800 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities and equity $ 436,800 300,000 408,000 $1,144,800 400,000 1,721,176 231,176 $1,952,352 $3,497,152 $ 524,160 636,808 489,600 $1,650,568 723,432 460,000 32,592 $ 492,592 $2,866,592 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $1,468,800 Note: "E" indicates estimated. The 2006 data are forecasts. Table IC 4-2. Income Statements 2006E 2005 2004 Sales $7,035,600 $6,034,000 $3,432,000 Cost of goods sold 5,875,992 5,528,000 2,864,000 Other expenses 550,000 519,988 358,672 Total operating costs excluding depreciation $6,425,992 $6,047,988 $3,222,672 EBITDA $ 609,608 ($ 13,988) $ 209,328 Depreciation 116,960 116,960 18,900 EBIT $ 492,648 ($ 130,948) $ 190,428 Interest expense 70,008 136,012 43,828 EBT $ 422,640 ($ 266,960) $ 146,600 Taxes (40%) 169,056 (106,784) 58,640 Net income $ 253,584 ($ 160,176) $ 87,960 $ EPS 1.014 ($ 1.602) $ 0.880 DPS 0.220 $ 0.110 $ 0.220 Book value per share 7.809 $ 4.926 $ 6.638 Stock price 12.17 $ 2.25 $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate 40.00% 40.00% 40.00% Lease payments 40,000 40,000 40,000 Sinking fund payments 0 0 0 Note: "E" indicates estimated. The 2006 data are forecasts. The firm had sufficient taxable income in 2003 and 2004 to obtain its full tax refund in 2005. Table IC 4-3. Ratio Analysis 2006E 2005 Current 1.2x Quick 0.4x Inventory turnover 4.7x Days sales outstanding (DSO) 38.2 Days inventory outstanding (DIO)* 85.0 Days payable outstanding (DPO) 31.4 Fixed assets turnover 6.4x Total assets turnover 2.1x Debt ratio 82.8% TIE -1.0x EBITDA coverage 0.1x Profit margin -2.7% ROA -5.6% ROE -32.5% Price/earnings -1.4x Price/cash flow -5.2x Market/book 0.5x Book value per share $4.93 Note: "E indicates estimated. The 2006 data are forecasts. a Calculation is based on a 365-day year. 2004 2.3x 0.8x 4.8x 37.4 91.1 18.6 10.0x 2.3x 54.8% 4.3x 3.0x 2.6% 6.0% 13.3% 9.7x 8.0x 1.3x $6.64 Industry Average 2.7x 1.0x 6.1x 32.0 70.0 30.0 7.0x 2.6x 50.0% 6.2x 8.0x 3.5% 9.1% 18.2% 14.2x 11.0x 2.4x n.a