Question 1 Integrative Complete ratio analysis Given the following financial statements (following and on page 109), historical ratios, and industry averages, calculate Sterling Company's financial ratios for the most recent year. (Assume a 365-day year.) 50,000 Sterling Company Income Statement for the Year Ended December 31, 2012 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 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 = 40%) 440,000 Net profits after taxes $ 660,000 Less: Preferred stock dividends 50,000 Earnings available for common stockholders S 610,000 Earnings per share (EPS) $3.05 Assets S 900,000 200,000 100,000 $ 1.200.000 Cash Marketable securities Accounts receivable Inventories Total current assets Gross fixed assets (at cost) Less: Accumulated depreciation Net fixed assets Sterling Company Balance Sheet December 31, 2012 Liabilities and Stockholders' Equity $ 200,000 Accounts payable" 50.000 Notes payable 800,000 Accruals 950,000 Total current liabilities $ 2,000,000 Long-term debt (includes $12,000,000 financial leases) 3.000.000 Preferred stock (25,000 shares, $ 9,000,000 $2 dividend) 1.000.000 Common stock (200,000 $12,000,000 shares at $3 par Paid-in capital in excess of $ 3,000,000 $ 1,000,000 Other assets Total assets 600,000 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 5,200,000 1,000,000 $ 7,800,000 $12,000,000 The firm has an 8-year financial lease requiring annual beginning-of-year payments of $50,000. Five years of the lease have yet to run "Annual credit purchases of $6,200,000 were made during the year. "The annual principal payment on the long-term debt is $100,000, "On December 31, 2012, the firm's common stock closed at $39.50 per share. Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market. Historical and Industry Average Ratios for Sterling Company Industry average, Actual 2010 Actual 2011 2012 Ratio 1.40 1.00 9.52 45.6 days 59.3 days 0.74 0.20 8.2 Current ratio Quick ratio Inventory turnover Average collection period Average payment period Total asset turnover Debt ratio Times interest earned ratio Fixed-payment coverage ratio Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Return on common equity (ROE) Earnings per share (EPS) Pricelearnings (PE) ratio Market/book (M/B) ratio 4.5 1.55 0.92 9.21 36.9 days 61.6 days 0.80 0.20 7.3 4.2 0.27 0.12 0.062 0.050 0.067 $2.20 10.5 1.05 1.85 1.05 8.60 35.5 days 46.4 days 0.74 0.30 8.0 4.2 0.25 0.10 0.053 0.040 0.066 $1.50 11.2 1.10 0.30 0.12 0.062 0.045 0.061 $1.75 12.0 1.20
