Comprehensive Ratio Analysis
You have just been hired as a loan officer at Luzon Bank. Your supervisor has given you a file containing a request from Helix Company, a manufacturer of auto components, for a P1,000,000 five-year loan. Financial statement data on the company for the last two years are given below:
HELIX COMPANY Comparative Statement of Financial Position This Year Last Year Assets Current assets: Cash...................... P 320,000 P 420,000 Marketable securities ...................!! 0 100,000 Accounts receivable, net . 900,000 600,000 Inventory ....... 1,300,000 800,000 Prepaid expenses ................! ...... 80,000 60,000 Total current assets ...................; ..... 2,600,000 1,980,000 Plant and equipment, net.. 3,100,000 2,980.000 Total assets................. ...... P5,700,000 P4.960,000 Liabilities and Equity Liabilities: Current liabilities.... P1,300,000 P 920,000 Bonds payable, 10%................ 1,200,000 1,000,000 Total liabilities ...... 2,500,000 1,920,000 Equity: Preference shares, 8%, P30 par value..... 600,000 600,000 Ordinary shares, P40 par value ........... 2,000,000 2,000,000 Retained earnings ................ 600,000 440,000 Total equity.. 3,200,000 3,040,000 Total liabilities and equity P5.700.000 P4.960,000HELIX COMPANY Comparative Income Statement This Year Last Year Sales (all on account).. P5,250,000 P4,160,000 Less cost of goods sold 4,200,000 3,300,000 Gross margin........... 1,050,000 860,000 Less operating expenses 530,000 520,000 Net operating income.... 520,000 340,000 Less interest expense .. 120,000 100,000 Net income before taxes . ...... 400,000 240,000 Less income taxes (30%) 120,000 72,000 Net income ............. 280,000 168,000 Dividends paid: Preference shares...............!!! 48,000 48,000 Ordinary shares .. 72,000 36,000 Total dividends paid 120,000 84,000 Net income retained. 160,000 84,000 Retained earnings, beginning of year 440,000 356,000 Retained earnings, end of year. P 600,000 P 440.000Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Helix's industry: Current ratio 2.3 to 1 Acid-test ratio 1.2 to 1 Average age of receivables 31 days Inventory turnover 60 days Return on assets 9.5% Debt-to-equity ratio 0.65 to 1 Times interest earned 5.7 Price-earnings ratio 10 Required: 1. You decide first to assess the rate of return that the company is generating. Compute the following for both this year and last year: a. The return on total assets. (Total assets at the beginning of last year were P4320300.) b. The return on ordinary equity. (Equity at the beginning of last year totaled P3316300. There has been no change in preference or ordinary share over the last two years.) C. Is the company's leverage positive or negative? Explain. 2. You decide next to assess the well-being of the ordinary shareholders. For both this year and last year, compute: a. The earnings per share. b. The dividend yield ratio for ordinary. c. The dividend payout ratio for ordinary. d. The price-earnings ratio. How do investors regard Helix Company as compared to other firms in the industry? Explain. e. The book value per share of ordinary. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain. f. The gross margin percentage. You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both this year and last year, compute: Working capital. The current ratio. The acid-test ratio. The average age of receivables. (The accounts receivable at the beginning of last year totaled P520300.) The inventory turnover. (The inventory at the beginning of last year totaled P640900.) The debt-to-equity ratio. g. The number of times interest was earned. Evaluate the data computed in (1) to (3) above, and using any additional data provided in the problem, make a recommendation to your supervisor as to whether the loan should be approved. Thrbtlpu'p
