a. Use these statements to calculate as many of the ratios in Table 2.2 as you can. b. What insights do these ratios provide about R&E's financial performance? What problems, if any, does the company appear to have? R&E Supplies, Inc. Income Statements 2014 2015 2016 2017* $11,190 $13,764 $16,104 $20,613 $9,400 $11,699 $13,688 $17,727 $1,790 $2,065 $2,416 $2,886 Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative (SG&A) expenses Net interest expense Earnings before tax Tax Earnings after tax $1,019 $100 $671 $302 $1,239 $103 $723 $325 $398 $1,610 $110 $696 $313 $383 $2,267 $90 $529 $238 $291 $369 Supplemental figures: Earnings before interest and taxes Tax rate (%) $771 45.0% $826 45.0% $806 45.0% $619 45.0% Assets Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets $671 $1,343 $1,119 $14 $3,147 $128 $3,275 $551 $1,789 $1,376 $12 $3,728 $124 $3,852 $644 $2,094 $1,932 $15 $4,685 $295 $4,980 $412 $2,886 $2,267 $18 $5,583 $287 $5,870 Liabilities and Owners' Equity Current Liabilities: Bank loan Accounts payable Current portion long-term debt Accrued wages Total current liabilities $50 $1,007 $60 $5 $1,122 $50 $1,443 $50 $7 $1,550 $50 $2,426 $50 $ 10 $2,536 $50 $3,212 $100 $18 $3,380 Long-term debt Common stock Retained earnings Total liabilities and owners' equity *Estimate $960 $150 $1,043 $3,275 $910 $150 $1,242 $3,852 $860 $150 $1,434 $4,980 $760 $150 $1,580 $5,870 Supplemental figures: Interest-bearing debt Owners' equity Invested capital Principal payment $1,070 $1,193 $2,263 NA $1,010 $1,392 $2,402 -$60 $960 $1,584 $2,544 -$50 $910 $1,730 $2,640 -$50 INSTRUCTIONS: COMPUTE THE FOLLOWING RATIOS ACCORDING TO CHAPTER 2. TABLE 2.4 Ratio (formatting) 2014 2015 2016 2017 Profitability ratios: Return on equity (%) Return on assets (%) Return on invested capital (%) Profit margin (%) Gross margin (%) Turnover - control ratios: Asset turnover (X) Fixed-asset turnover (X) Inventory turnover (X) Collection period (days) Days' sales in cash (days) Payables period (days) Leverage and liquidity ratios: Assets to equity (%) Total liabilities to assets (%) Total liabilities to equity (%) Long-term debt to equity (%) Times interest earned (X) Times burden covered (X) Current ratio (X) Acid test (X) Growth: Sales growth NA Insights about R&E Supplies. What problems does R&E appear to have? 1. Profitability ratios: 2. Turnover and control ratios: 3. Leverage and liquidity: 4. Sales growth: HC Assessing the Financial Health of the Firm TABLE 2.4 4 Definitions of Principal Ratios Appearing in the Chapter Definitions of Principal Ratios Appeari Profitability Ratios Return on equity = Net income/Shareholders' equity Return on assets Return on invested capital Earnings before interest and taxes x (1 - Tav Interest-bearing debt + Shareholders' equit = Net income/Assets Profit margin Gross margin Price to earnings Turnover-Control Ratios = Net income/Sales = Gross profit/Sales = Price per share/Earnings per share Asset turnover Fixed-asset turnover Inventory turnover Collection period = Sales/Assets = Sales/Net property, plant, and equipment = Cost of goods sold/Ending inventory Accounts receivable/Credit sales per day (If credit sales unavailable, use sales) = Cash and securities/Sales per day = Accounts payable/Credit purchases per day (If purchases unavailable, use cost of goods sold) Days' sales in cash Payables period Leverage and Liquidity Ratios Assets to equity Debt to assets Debt to equity Times interest earned Times burden covered = Assets/Shareholders' equity = Total liabilities/Assets (Interest-bearing debt is often substituted for total liabilities) = Total liabilities/Shareholders' equity = Earnings before interest and taxes/Interest expense Earnings before interest and taxes Interest exp. + Prin. pay./(1 - Tax rate) Total liabilities No. equity shares x Price/share + Total liabilities Total liabilities No. equity shares x Price/share Debt to assets (market value) Debt to equity (market value) Current ratio Acid test = Current assets/Current liabilities Current assets - Inventory Current liabilities