Sue Sims (controller): I really need you to analyze Winco Construction Company and see if we should extend them credit for this project we are deciding upon. I want you to analyze their financial statements and review their financial ratios (liquidity, solvency, efficiency, profitability and market ratios). We really need to insure that this customer is worthy of credit and can pay for our services.

Scenario Steps to Completion You are to analyze various aspects of a customer firm and our firm; Stirm Windows Inc. and to perform various financial analysis tasks associated with the customer firm Winco Const. to ensure their financial strength is sufficient to justify several large orders received from the firm and an investment in the firm itself.

Some basic statistics are needed to assess the firms financial health, given the amount of business the two firms transact.

Calculate the appropriate ratios which should include the Dupont ratio among others.

Place the numbers into the following context of questions that Sue wants answered:

Are these ratios sufficient enough for you to evaluate our customer?

What do you conclude about the firms financial health and any change from 2013 to 2014?

Is this a firm we would feel comfortable extending significant credit to in the future?

We are also looking to take a minority ownership position in Winco Const. and need a profitability analysis. Use the decomposed Dupont model to analyze the drivers (return on assets, profit margin, debt/leverage) of Wincos return on equity (ROE) for 2014. What can you conclude about the drivers of Wincos ROE?

Concept Check: Ratios are simply the relationship between two variables.

Keep in mind where the numbers are coming from in the financial statements and think about how these variables relate to one another and what the result shows in general before we look at the specific company.

Helpful Hint: When calculating financial ratios you need to place them in context of either; a competitor, previous years results or to industry benchmarks. A single ratio merely shows a relationship between two variables.

The financial statements are provided below:

Winco Construction Inc. 2014 Income Statement ($ in millions) Net sales $8,450 Less: Cost of goods sold 7,240 Less: Depreciation 400 Earnings before interest and taxes 810 Less: Interest paid 70 Taxable Income $ 740 Less: Taxes 259 Net income $ 481 Winco Construction Inc.. 2013 and 2014 Balance Sheets ($ in millions) 2013 2014 2013 2014 Cash $ 120 $ 140 Accounts payable $1,110 $1,120 Accounts rec. 930 780 Long-term debt 840 1,210 Inventory 1,480 1,520 Common stock 3,200 3,000 Total $2,530 $2,440 Retained earnings 530 710 Net fixed assets 3,150 3,600 Total assets $5,680 $6,040 Total liabilities & equ $5,680 $6,040 Average Industry Ratios Lower Quartile Median Upper Quartile Days sales in receivables 60 40 30 Cash Coverage ratio 2.0 10.0 18.0 Debt ratio 1.00 .90 0.80 Return on Equity 13 14.0 15.0