Question 2

Key Ratios for ABC, Inc. and Its Industry

ABC, Inc. 1994 Ratios Industry Average Ratios in 1994

Current ratio 1.2 1.4

Acid test ratio 0.89 0.94

Average collection period 30 days 25 days

Inventory turnover 18.1 20.3

Fixed assets turnover 4.1 4.8

Total asset turnover 2.78 2.8

Debt ratio 50% 60%

Times-interest-earned 5.5% 4.5%

Net profit margin 1.15% 1.5%

Return on equity 5.21% 7.32%

ABC, Inc. Income Statement (in thousands)

December 31, 1995

Sales (all credit) $200,000

Cost of goods sold 140,000

Gross profit on sales 60,000

Operating expenses 56,000

Operating income 4,000

Interest expense 1,000

Earnings before tax 3,000

Income tax 1,050

Net income available to common stockholders $1,950

ABC, Inc. Balance Sheet (in thousands)

December 31, 1995

Assets

Cash $2,000

Accounts receivable 17,800

Inventories 8,700

Total current assets 28,500

Gross fixed assets 70,000

Accumulated depreciation 26,500

cNet fixed assets 43,500

Total assets $72,000

Liabilities and Equity

Accounts payable $18,000

Accruals 13,350

Total current liabilities 31,350

Long-term debt 8,250

Total liabilities 39,600

Common stock (par value and paid in capital) 2,000

Retained earnings 30,400

Total stockholders' equity 32,400

Total liabilities and equity $72,000

Required:

a. Calculate the following ratios for ABC Inc. for 1995

- Average collection period

- Inventory turnover

- Fixed asset turnover

- Current ratio

- Acid test ratio

- Debt to total asset ratio

- Net profit margin

- Return on equity

b. Comment on the firms liquidity and profitability, taking into consideration the industry averages.