Question
Help on my Finance homework please! Integrative: Complete ratio analysis Given the following financial statements, historical ratios, and industry averages, calculate Sterling Companys financial ratios
Help on my Finance homework please!
Integrative: Complete ratio analysis Given the following financial statements, historical ratios, and industry averages, calculate Sterling Companys financial ratios for the most recent year. (Assume a 365-day year.)
Sterling Company Income Statement for the Year Ended December 31, 2019
Sales revenue $10,000,000
Less: Cost of goods sold 7,500,000
Gross profits $ 2,500,000
Less: Operating expenses
Selling expense $ 300,000
General and administrative expenses 650,000
Lease expense 50,000
Depreciation expense 200,000
Total operating expense $ 1,200,000
Operating profits $ 1,300,000
Less: Interest expense 200,000
Net profits before taxes $ 1,100,000
Less: Taxes (rate = 21%) 231,000
Net profits after taxes $ 869,000
Less: Preferred stock dividends 50,000
Earnings available for common stockholders $ 819,000
Earnings per share (EPS) $4.10
Sterling Company Balance Sheet December 31, 2019
Assets Liabilities and Stockholders Equity
Cash $ 200,000 Accounts payablea $ 900,000
Marketable securities 50,000 Notes payable 200,000
Accounts receivable 800,000 Accruals 100,000
Inventories 950,000 Total current liabilities $ 1,200,000
Total current assets $ 2,000,000 Long-term debt (includes financial leases) $ 3,000,000
Gross fixed assets (at cost) $12,000,000
Less: Accumulated depreciation 3,000,000 Preferred stock (25,000 shares, $2 dividend) $ 1,000,000
Net fixed assets $ 9,000,000
Other assets 1,000,000 Common stock (200,000 shares at $3 par)b 600,000
Total assets $12,000,000 Paid-in capital in excess of par value 5,200,000
Retained earnings 1,000,000
Total stockholders equity $ 7,800,000
Total liabilities and stockholders equity $12,000,000
Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firms liquidity, activity, debt, profitability, and market.
Historical and Industry Average Ratios for Sterling Company
Ratio Actual 2017 Actual 2018 Industry average, 2019
Current ratio 1.40 1.55 1.85
Quick ratio 1.00 0.92 1.05
Inventory turnover 9.52 9.21 8.60
Average collection period 45.6 days 36.9 days 35.5 days
Average payment period 59.3 days 61.6 days 46.4 days
Total asset turnover 0.74 0.80 0.74
Debt ratio 0.20 0.20 0.30
Times interest earned ratio 8.2 7.3 8.0
Fixed-payment coverage ratio 4.5 4.2 4.2
Gross profit margin 0.30 0.27 0.25
Operating profit margin 0.12 0.12 0.10
Net profit margin 0.062 0.062 0.053
Return on total assets (ROA) 0.045 0.050 0.040
Return on common equity (ROE) 0.061 0.067 0.066
Earnings per share (EPS) $1.75 $2.20 $1.50
Price/earnings (P/E) ratio 12.0 10.5 11.2
Market/book (M/B) ratio 1.20 1.05 1.10
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