Financial Statement Analysis Problem - 10 Points: The Vanguard Group, Inc. has compiled the following financial statements and comparative financial ratios for the year-end review. Balance Sheet Vanguard Group, Inc. December 31, 2017 Assets Current assets Cash $ 118,750 Accounts receivable 296,250 Inventory 303,750 Total current assets $ 718,750 Gross fixed assets $625,000 Less: Accumulated depreciation _193,750) Net fixed assets 531,250 Total assets $1.250,000 Liabilities and stockholders' equity Current liabilities Accounts payable $ 111,250 Notes payable 211,250 Accruals 108,750 Total current liabilities $ 431,250 Long-term debt 235,000 Total liabilities $ 666,250 Stockholders' equity Common stock 318,750 Retained earnings 265,000 Total stockholders' equity $ 583,750 Total liabilities and stockholders' equity $1.250,000 Income Statement Vanguard Group, Inc. for the Year Ended December 31, 2017 Sales revenue $1,680,000 Cost of sales 1,362,480 Gross profits $317,520 Less: Operating expenses Selling expense $ 125,600 General and administrative expense 81,600 Depreciation expense 24,000 Total operating expense $231,200 Operating profits $ 86,320 Less: Interest expense 15,600 Net profits before taxes $ 70,720 Less: Taxes (40%) 28,288 Net profits after taxes $42.432 Historical and Industry Average Ratios Vanguard Group, Inc. Industry Average Ratio 2015 2016 2017 Industry Avg. Current ratio 1.6 1.2 Quick ratio Inventory turnover 6.0 Average collection period 40 days 50 days 40 days Debt ratio 60% 56% 50% Net profit margin 2.0% 2.3% 3% Return on equity 7.5% 7.95% 10.5% Required: a. Calculate the firm's 2017 financial ratios. b. Provide a brief (one or two paragraphs) analysis of the firm's performance from both time- series and cross-sectional viewpoints. In this problem, you are asked to calculate seven (7) ratios and evaluate the results. The first two ratios are to evaluate liquidity; that is, does the company have enough cash to pay its bills on time, the third and fourth to evaluate "activity", that is how efficiently the company is managing its working capital accounts, the fifth is an evaluation of how much debt the company is using to finance its assets, and the sixth and seventh is an evaluation of profitability. So for the two liquidity ratios: Current Ratio: 1. Current assets / Current Liabilities (both found on the Balance Sheet). The resulting ratio will indicate how much the company has in "liquid" assets for every dollar it owes in current liabilities. Once you get the result, you want to compare that result to the company over time and also against its peer group. 2. Quick Ratio: This is essentially the same as the current ratio, except it removes the Inventory balance from the numerator of current assets. The thinking here is that when it comes right down to the company having to come up with cash to meet its obligations, Inventory is not really that "liquid" as it takes time to sell the inventory and collect the associated accounts receivable
