Hemingway Corporation manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel$-$electric locomotives in the United States. The company is considering expanding its operations worldwide to boost its income and cash flows. The expansion project will require the company to raise $$100$ million capital to finance the project. Mike Schenk, MBA has been hired to assist the company with the preparation of financial statement analysis and to suggest actions needed to raise the needed funds. Schenk is directed to send copies of the financial statement analysis to management of the company, potential lenders, and strategic investors. The balance sheet and income statement for the company are shown below.

Balance Sheet $($Millions of Dollars$)$

$2019$

$2020$

$2021$Est.

Assets

Cash and equivalents

$62$

$52$

$52$

Short$-$term investments

$102$

$12$

$52$

Accounts receivable

$402$

$522$

$532$

Inventories

$640$

$840$

$680$

Total current assets

$1,206$

$1,426$

$1,316$

Net fixed assets

$2,920$

$3,520$

$3,720$

Total assets

$4,126$

$4,946$

$5,036$

Liabilities and equity

Accounts payable

$330$

$430$

$365$

Notes payable

$182$

$252$

$120$

Accruals

$200$

$240$

$272$

Total current liabilities

$712$

$922$

$757$

Long$-$term bonds

$800$

$1,100$

$1,100$

Total liabilities

$1,512$

$2,022$

$1,857$

Common stock $(100,000$ shares$)$

$1,000$

$1,000$

$1,000$

Retained earnings

$1,650$

$1,924$

$2,216$

Total common equity

$2,650$

$2,924$

$3,216$

Total liabilities and equity

$4,126$

$4,946$

$5,036$

Income Statement $($millions of Dollars$)$

$2019$

$2020$

$2021$Est.

Net sales

$6,500$

$7,000$

$7,600$

Cost of goods sold

$4,400$

$4,800$

$5,320$

Depreciation

$292$

$322$

$372$

Other operating expenses

$360$

$400$

$410$

Earnings before interest and taxes $($EBIT$)$

$1,448$

$1,478$

$1,498$

Less interest

$68$

$108$

$100$

Pre$-$Tax earnings

$1,380$

$1,370$

$1,398$

Taxes $(25\%)$

$345$

$343$

$350$

Net Income

$1,035$

$1,028$

$1,049$

Industry average for selected ratios

Profit margin

$16\mathrm{.}0\%$

Inventory turnover

$6\mathrm{.}0$

Operating profit margin

$22\mathrm{.}0\%$

Fixed assets turnover

$2\mathrm{.}3$

Basic Earning power

$35\mathrm{.}5\%$

Total assets turnover

$1\mathrm{.}6$

ROA

$25\mathrm{.}6\%$

Current

$2$

ROE

$36\mathrm{.}5\%$

Quick

$0\mathrm{.}85$

P$/$E ratio

$9\mathrm{.}4$

Debt ratio

$30\mathrm{.}0\%$

$1.$ The financial ratio analysis of the company is being conducted for management, equity investors, and long$-$term potential creditors. Explain the primary emphasis of each of these groups in evaluating the ratios.

$2.$ Calculate the following profitability ratios for Hemingway Corporation for $2020$:

i$.$ Operating profit margin

ii$.$ Return on assets $($ROA$)$

iii. Return on equity $($ROE$)$

iv$.$ Basic Earning Power $($BEP$)$

$3.$ Calculate the following asset management ratios for Hemingway Corporation for $2020$:

i$.$ total assets turnover

ii$.$ Fixed assets turnover

iii. Inventory turnover

$4.$ Calculate the following liquidity and debt management ratios for Hemingway Corporation in $2020$:

i$.$ Current ratio

ii$.$ Quick ratio

iii. Debt ratio

$5.$ Explain trend analysis. Calculate the projected profitability ratios for Hemingway Corporation for $2021.$

$6.$ Using the trend analysis indicate whether the financial performance of Hemingway Corporation has improved or worsened over the years.

$7.$ Explain benchmarking. Indicate whether the asset management ratios of the company have improved or worsened relative to the industry.

$8.$ Mike Schenk is using the extended Dupont equation to predict the Return on Equity $($ROE$)$ for Hemingway Corporation for $2022.$ He forecasts the following ratios for $2022.$

Ratio

Profit margin

$16\mathrm{.}0\%$

Total assets turnover

$1\mathrm{.}6$

Equity multiplier

$1\mathrm{.}7$

Calculate the Return on Equity $($ROE$)$ for Hemingway Corporation for $2022.$

$9.$ Mike Schenk explains to the CEO that although financial ratio provides useful information concerning the company$$s operation, it has limitations that necessitate care and judgment. Identify four limitations of ratio analysis that Mike is addressing.

$10.$ In the report sent to investors and credit lenders, Mike indicated that financial statement analysis goes beyond comparing ratios, and that qualitative factors must be considered as well. Identify five such qualitative factors that the users of the financial statement should consider when evaluating the company$$s future financial performance.