Jack Arnold is a resident of Lubbock, Texas, where he is a prosperous rancher and businessman. He has also built up a sizable portfolio of common stock, which, he believes, is due to the fact that he thoroughly evaluates each stock he invests in. As Jack says, You cant be too careful about these things! Anytime I plan to invest in a stock, you can bet Im going to learn as much as I can about the company. Jack prefers to compute his own ratios even though he could easily obtain analytical reports from his broker at no cost. (In fact, Bob Smith, his broker, has been volunteering such services for years.) Recently Jack has been keeping an eye on a small chemical stock. The firm, South Plains Chemical Company, is big in the fertilizer businesswhich is something Jack knows a lot about. Not long ago, he received a copy of the firms latest financial statements (summarized here) and decided to take a closer look at the company. South Plains Chemical Company Balance Sheet ($ thousands) Cash $ 1,250 Accounts receivable $ 8,000 Current liabilities $10,000 Inventory $12,000 Long-term debt $ 8,000 Current assets $21,250 Stockholders equity $12,000 Fixed and other assets $ 8,750 Total liabilities and Total assets $30,000 stockholders equity $30,000 South Plains Chemical Company Income Statement ($ thousands) Sales $50,000 Cost of goods sold $25,000 Operating expenses $15,000 Operating profit $10,000 Interest expense $ 2,500 Taxes $ 2,500 Net profit $ 5,000 Dividends paid to common stockholders ($ in thousands) $ 1,250 Number of common shares outstanding 5 million Recent market price of the common stock $ 25 Questions Using the South Plains Chemical Company figures, compute the following ratios. Latest Industry Averages Latest Industry Averages Liquidity Profitability a. Net working capital N/A h. Net profit margin 8.5% b. Current ratio 1.95 i. Return on assets 22.5% Activity j. ROE 32.2% c. Receivables turnover 5.95 Common-Stock Ratios d. Inventory turnover 4.50 k. Earnings per share $2.00 e. Total asset turnover 2.65 l. Price-to-earnings ratio 20.0 Leverage m. Dividends per share $1.00 f. Debt-equity ratio 0.45 n. Dividend yield 2.5% g. Times interest earned 6.75 o. Payout ratio 50.0% p. Book value per share $6.25 q. Price-to-book-value ratio 6.4 Compare the company ratios you prepared to the industry figures given in part a. What are the companys strengths? What are its weaknesses? What is your overall assessment of South Plains Chemical? Do you think Jack should continue with his evaluation of the stock? Explain.