Donna Jamison was recently hired as a financial analyst by NewPorte Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gat Statomont of Cash Flows (2019) Operating Activities Net income $55.275 Other additions (sources of cash) Depreciation 20.000 Increase in accounts payable 29,600 Increase in accruals 4,000 Subtractions (uses of cash) Increases in accounts receivable (50,800) Increase in inventories (120,800) Net cash flow from operations $(62,725) Long-Torm Investing Acthities Investment in fixed assets $(36,000) Financing Activities Increase in notes payable $25,000 Increase in long-term debt $101,180 Payment of cash dividends $22,0002 Net cash flow from financing Net change in cash account Cash at beginning of year Cash at end of year (continued) Assume that you are Donna Jamison's assistant and that she has asked you to help her prepare a report that evaluates the company's financial condition. Answer the following questions: a. What can you conclude about the company's financial condition from its statement of cash flows? b. What is the purpose of financial ratio analysis, and what are the five major categories of ratios? c. What are NewPorte's current and quick ratios? What do they tell you about the company's liquidity position? d. What is NewPont's inventory tumover, day's sales outstanding. fixed assets tumover and total assets turnover ratios? How does the firm's utiization of assets stack up against that of the industry? e. What are the firm's debt, times-interest-earned, and fixed charge coverage ratios? How does NewPorte compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios? f. Calculate and discuss the firm's profitability ratios - that is, its net profit margin, return on assets (ROA), and return on equity (ROE). g. Calculate NewPorte's market value ratios - that is, its price/earnings ratio and its market/book ratio. What do these ratios tell you about investors' opinions of the company? h. Use the DuPont equation to provide a summary and overview of NewPorte's financial condition. What are the firm's major strengths and weaknesses? i. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in one of the ratios -say, the DSO-would affect the stock price. For example, if the company could improve its collection procedures and thereby lower the DSO from 38.1 days to 27.8 days, how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price? j. Although financial statement analysis can provide useful information about a company's operations and its financial condition, this type of analysis does have some potential problems and limitations, and it must be used with care and judgment. What are some problems and limitations
