FINANCIAL ANALYSIS

Below are comparative statements of financial position, statement of earnings and other miscellaneous details for MJ Sleep Shop, as well as selected key ratios from industry on the following page. Use your formula sheet for this question.

MJ Sleep Shop Inc. Statement of Earnings For year ended December 31, 2015 (in thousands of dollars)

Net sales.................................... $3,250

Cost of goods sold .................... 2,210

Gross profit ................................ $1,040

Selling expenses ....................... $520

General and admin. expenses ... 170

Interest expense ........................ 50

Income tax expense .................. 110

Total expenses .......................... 850

Net income ................................ $190

MJ Sleep Shop Inc. Comparative Statements of Financial Position at December 31 (in thousands of dollars)

2015 2014

Cash $125 $ 100

Accounts receivable (net) 200 150

Merchandise inventory 400 370

Property, plant and equipment (net) 1,030 1,000

Accounts payable 295 230

Notes payable (no1) 170 190

Mortgage payable (no2) 400 500

Common shares (no3(a), 3(b)) 500 500

Retained earnings 390 200

1. Note payable: $50,000 of the notes payable listed at year end 2014 are due in 2015. 2. Mortgage payable: $100,000 of the mortgage payable at year end 2014 is due in 2015. 3(a). Common shares: 40,000 shares were issued and outstanding throughout fiscal years 2014 and 2015; no shares were issued or repurchased during 2015. 3(b). The average market price per share over fiscal year 2015 was $15.25.

The following 2015 industry average information for comparable businesses is also available:

Accounts receivable turnover 10.87 Acid-test ratio 1.42 Basic earnings per share $ 2.79 Book value per common share $ 18.00 Book value per preferred share n/a Current ratio 2.76 Days sales in inventory 64.12 Days sales uncollected 36.44 Debt ratio (debt to total assets) 40.20% Dividend yield 14.65% Equity ratio 59.80% Gross profit margin 39.82% Inventory turnover 5.56 Pledged assets to secured liabilities 1.85 Price-earnings ratio 8.47 Profit margin 5.65% Return on common shareholders equity 17.24% Return on total assets 3.38% Times interest earned 11.42 Total asset turnover 1.87

Required: (express ratios to two decimal places) a. Evaluate the companys short term debt paying ability for the year ended December 31, 2015. (1) Select and calculate an appropriate ratio. (2) State whether the result is favorable or unfavorable with respect to Industry.

b. Evaluate how efficiently the company uses its inventory for the year ended December 31, 2015. (1) Select and calculate an appropriate ratio. (2) State whether the result is favorable or unfavorable with respect to Industry.

c. Evaluate the companys profitability of equity for the year ended December 31, 2015. (1) Select and calculate an appropriate ratio. (2) State whether the result is favorable or unfavorable with respect to Industry.

d. Evaluate the companys gross profit earned for each dollar of sales for the year ended December 31, 2015. (1) Select and calculate an appropriate ratio. (2) State whether the result is favorable or unfavorable with respect to Industry.

e. Name a ratio not already used that a long-term creditor would be interested in to assess the companys solvency for the year ended December 31, 2015. Compute the ratio and determine whether the results are favorable or unfavorable when compared to Industry.