Current year Last year

Assets

Current Assets

Cash $960,0001,260,000$

Marketable securities $0300,000$

A$/$c receivable $$net $2,700,0001,800,000$

Inventory $3,900,0002,400,000$

Prepaid expenses $240,000180,000$

Total current assets $7,800,0005,940,000$

Plant & equip net $9,300,0008,940,000$

Total assets $17,100,00014,880,000$

Liabilities & Equities

Liabilities

Current liabilities $3,900,0002,760,000$

Note payable $10\%3,600,0003,000,000$

Total Liabilities $7,500,0005,760,000$

Stockholder$$s equity

Commons stock $78$ $ par $7,800,0007,800,000$

Retained earnings $1,800,0001,320,000$

Total stockholder$$s equity $9,600,0009,120,000$

Total Liabilities & Stockholder$$s equity $17,100,00014,880,000$

Current year Last year

Sales $($all on account $)15,750,00012,480,000$

Cost of goods sold $12,600,0009,900,000$

Gross margin $3,150,0002,580,000$

Selling & Admin exp $1,590,0001,560,000$

Net operating income $1,560,0001,020,000$

Interest expense $360,000300,000$

Net income before tax $1,200,000720,000$

Income taxes $(30\%)360,000216,000$

Net income $840,000504,000$

Common dividends $360,000252,000$

Net income retained $480,000252,000$

Beginning retained earnings $1,320,0001,068,000$

Ending retained earnings $1,800,0001,320,000$

To begin your assignment $,$ you gather the following financial data and ratios that are typical of companies in ABC company$$s industry :

Manual

Ratio Ratio definition Calculation As Case

Current ratio "Current ratio $=$ total current assets $/$ total current liabilities

$=7,800,000/3,900,000"2\mathrm{.}002\mathrm{.}3$

Quick test ratio Quick Ratio $=($total current assets $-$ inventories$)/$ total current liabilities $1\mathrm{.}001\mathrm{.}2$

Average collection period "Average Collection Period

$=365$ days $/$ Average Account Receivable Turnover Ratio" $5230$ Days

$365$ days $/5\mathrm{.}547=66$ Days

"Accounts Receivable Turnover $=$ Sales $/$ Average accounts receivables $=$

$=15,750,000/((2,700,000+1,800,000)/2)=15,750,000/3,150,000=7\mathrm{.}0"7$

Average sale period "Average Sale Period

$=($Accounts Receivable $/$ Total Credit Sales$)$ X Number of Days in Period

$=(2,700,000/15,750,000)$ X $365"6360$ Days

"The average collection period is calculated as

$(365$ days $/$ Sales$)*$ Accounts Receivable.

$=(365/15,750,000)$ x $2,700,000"63$

Return on assets "Return on assets $=$

Net Income retained $/($Fixed Assets $+$ Current Assets $-$ Current Liabilities$)$

$=480,000/(7,800,000-3,900,000)"0\mathrm{.}10\mathrm{.}1$

Debt to equity ratio "Debt to Equity Ratio $=$ Total Liabilities $/$ Stockholder$$s Equity

$=(7,500,000/9,600,000)"0\mathrm{.}780\mathrm{.}7$

Times interest earned ratio "Times Interest Earned Ratio $=$ Net Operating Income $/$ Interest Expense.

$=1,560,000/360,000"4\mathrm{.}335\mathrm{.}7$

Price earnings ratio Market Price per Share $/$ Earnings per Share $($EPS$)10\mathrm{.}0$

Ration Requested Ratio definition Current year Last year

The times interest earned ratio "Times Interest Earned Ratio $=$ Net Operating Income $/$ Interest Expense

Net Operating Income $=$ Net Income Before Tax $+$ Interest Expense" $4\mathrm{.}3333\mathrm{.}400$

The debt to equity ratio Total Liabilities $/$ Stockholder$$s Equity. $78\%63\%$

The gross margin percentage Gross Margin Percentage $=$ Gross Margin $/$ Sales $20\%21\%$

The return on total assets $($the total assets at the beginning of last year were $12,960,000$ $ $)$ "Return on Total Assets $=$ Net Income $/$ Average Total Assets

$840,000/((17,100,000+14,880,000)/2)=0\mathrm{.}0525$

$504,000/((14,880,000+12,960,000)/2)=0\mathrm{.}0362"3\mathrm{.}00\%3\mathrm{.}62\%$

"The return on equity $($ Stockholder$$s equity at the beginning of last year totaled $9,048,000$ $ $.$

There has been no change in common stock over the last two years $)"$ "Return on Equity $=$ Net Income $/$ Average Equity

$840,000/((9,600,000+9,120,000)/2)=0\mathrm{.}090$

$504,000/((9,120,000+9,048,000)/2)=0\mathrm{.}055"9\mathrm{.}0\%5\mathrm{.}5\%$

$"$Is the company$$s financial leverage positive or negative $?$

Explain" If a company's Return on Assets $($ROA$),$ which measures how efficiently it generates profit from its assets, if ROA below $10\%,$ it indicates that the company is not generating sufficient profit from its assets to pay the interest expenses on its debts. In other words, the cost of borrowing exceeds the income generated by using the borrowed funds, resulting in a financial loss for the company. Financial Leverage: Negative as ROA of $5\mathrm{.}25\%$ is less than the interest rate of $10\%)$ Financial Leverage: Negative as ROA of $3\mathrm{.}62\%$ is less than the interest rate of $10\%)$

Ration Requested Ratio definition Current year Last year

Earnings per share "The earnings per share $($EPS$)$ current year $=$

Current year # of shares $=7,800,000/$ $$78=100,000$

Net Income $/$ Number of Shares Outstanding $=840,000/7,800,000=0\mathrm{.}108$

Net Income $/$ Number of Shares Outstanding $=840,000/(7,800,000/78)=8\mathrm{.}4$

Last year # of shares outstanding $=7,800,000$

Based on these ratios, assess the performance in comparison to its competitors.