Question
All-Things Inc. manufactures a variety of consumer products. The company's founders have managed the company for thirty years and are now interested in selling the
All-Things Inc. manufactures a variety of consumer products. The company's founders
have managed the company for thirty years and are now interested in selling the
company and retiring. Trist Associates is looking into the acquisition of All-Things
and has requested the company's latest financial statements and selected financial
ratios in order to evaluate All-Things' financial stability and operating efficiency. The
summary information provided by All-Things is presented below.
All-Things Inc
Income Statement
For the Year Ended May 31, Year 3
(in thousands)
Sales ................................................................... $30,500
Expenses:
Cost of goods sold .......................................... 17,600
Selling and administrative expense ................ 3,050
Depreciation and amortization expense ......... 1,890
Interest expense .............................................. 900
Total expenses ................................................... 23,440
Income before taxes ........................................... 7,060
Income taxes ...................................................... 2,900
Net income ........................................................ $ 4,160
All-Things Inc.
Comparative Statement of Financial Position
As of May 31
(in thousands)
Year 3 Year 2
Cash ............................................................... $ 400 $ 500
Marketable securities ..................................... 500 200
Accounts receivable, net ................................ 3,200 2,900
Inventory ........................................................ 5,800 5,400
Total current assets ........................................ 9,900 9,000
Property, plant, and equipment, net ............... 7,100 7,000
Total assets ..................................................... $17,000 $16,000
Accounts payable ........................................... $ 3,700 $ 3,400
Income taxes payable ..................................... 900 800
Accrued expenses .......................................... 1,700 1,400
Total current liabilities ................................... 6,300 5,600
Long-term debt .............................................. 2,000 1,800
Total liabilities ............................................... 8,300 7,400
Common stock $(1 par value) ........................ 2,700 2,700
Paid-in-capital in excess of par ...................... 1,000 1,000
Retained earnings ........................................... 5,000 4,900
Total stockholders equity ............................. 8,700 8,600
Total liabilities and stockholders equity ....... $17,000 $16,000
Selected Financial Ratios
Current
All-Things Industry
Year 2 Year 1 Average
Current ratio ........................ 1.61 1.62 1.63
Acid-test ratio ...................... 0.64 0.63 0.68
Inventory turnover ............... 3.17 3.21 3.18
Times interest earned ........... 8.55 8.50 8.45
Debt-to-equity ratio ............. 0.86 1.02 1.03
Required:
a. Calculate the above ratios for fiscal year Year 3 for All-Things Inc.
b. What do these ratios tell you about the company's operations and ability to take on
additional debt?
c. Identify two limitations of ratio analysis
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