## Current Ratio

- Calculate XYZ’s 2013 current and quick ratios based on the projected balance sheet and income statement data.

Answer 1:

Current ratio is calculated through dividing the current assets with current liabilities. According to the given information current ratio is as follows:

(Total Current Assets ÷ Total Current Liabilities)

($2,680,112÷$1,114,800)

= 2.4

Therefore, Current Ratio of XYZ of 2013 is 2.4

Quick ratio is calculated through dividing the quick assets with current liabilities. Considering the given data, quick ratio is as follows:

[(Total Current Assets – Inventories) ÷ (Total Current Liabilities)]

= [($2,680,112 – $1,716,480) ÷ ($1,114,800)]

= [$963,632 ÷ $1,114,800]

= .86

Therefore, quick ratio of XYZ of 2013 is .86

- Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.

Inventory Turnover Ratio is calculated through dividing the Cost of Goods sold with the Average Inventory. Considering the given data, Inventory Turnover Ratio of 2013 of XYZ is as follow:

Cost of Goods Sold in 2013 ÷ Average Inventory

= [Cost of Goods Sold in 2013 ÷ {(Inventories of 2013 + Inventories of 2012) ÷ 2}]

= [$5,875,992 ÷ {($1,716,480 + $1,287,360) ÷ 2}]

= $5,875,992 ÷ $1,501,920

= 3.91

Therefore, Inventory Turnover Ratio is 3.91

Days Sales Outstanding is calculated through dividing the Account Receivable with the sales of one year, multiplied with 365. Considering the given data Days Sales Outstanding is as follows:

Accounts receivable ÷ (sales x 365)

= $878,000 ÷ ($7,035,600 x 365)

= 45.55

Therefore, Days Sales Outstanding of XYZ is 45.55 days.

Fixed Assets Turnover is calculated through dividing the Sales value with the Average Net Fixed Assets. Taking the given data into consideration, Fixed Assets Turnover is as follow:

Sales of 2013 ÷ Average Net Fixed Assets

= [Sales of 2013 ÷ {(Net Fixed Assets of 2013 + Net Fixed Assets of 2012) ÷ 2}]

= [$7,035,600 ÷ ($817,040 + $939,790) ÷ 2]

= $7,035,600 ÷ 878,415

= 8.01

Therefore, Fixed Assets Turnover is 8.01for XYZ during 2013.

Total Assets Turnover is calculated through dividing the total sales with the Average Total Fixed Assets. Considering the given financial statement, Total Assets Turnover of the firm of 2013 is as follows:

Sales of 2013 ÷ Average Net Fixed Assets

= [Sales of 2013 ÷ {(Total Assets of 2013 + Total Assets of 2012) ÷ 2}]

= [$7,035,600 ÷ ($3,497,152 + $2,866,592) ÷ 2]

= $7,035,600 ÷ 3,181,872

= 2.21

Therefore, Total Assets Turnover of the firm of 2013 is 2.21.

- Calculate the 2013 debt-to-assets and times-interest-earned ratios.

Debt-to-Assets of the XYZ firm can be calculated through dividing the Total Debt with the Total Assets. Considering the given data, Debt-to-Assets ratio is as follow:

## Quick Ratio

Total Debt of 2013 ÷ Total Assets of 2013

= $1,544,800 ÷ $3,497,152

= 0.44

Therefore, Debt-to-Assets of the XYZ firm of 2013 is 0.44

Times-Interest-Earned Ratios is calculated through dividing the EBIT of XYZ of 2013 with the Interest Expense. According to the given data, Times-Interest-Earned Ratios are as follows:

EBIT of 2013 ÷ Interest Expense

= 492,648 ÷ 70,008

= 7.04

Therefore, Times-Interest-Earned Ratios of the XYZ firm of 2013 is 7.04

- Calculate the 2013 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).

Operating Margin is calculated through dividing the Gross Profit of the XYZ with the Sales of the same year and multiplying the same with 100. Considering the given data, Operating margin is as follow:

(Gross Profit of 2013 of XYZ ÷ Sales of 2013 of XYZ) x 100

= [(Sales – Cost of Goods Sold) ÷ Sales] x 100

= [(7,035,600 – 5,875,992) ÷ 7,035,600] x 100

= [1,159,608 ÷ 7,035,600] x 100

= 0.1648 x 100

= 16.48%

Therefore, Operating Margin is 16.48%

Profit Margin is calculated through dividing the Net Profit of the XYZ with the Sales of the same year and multiplying the same with 100. Considering the given data, Profit Margin is as follow:

(Net Profit of 2013 of XYZ ÷ Sales of 2013 of XYZ) x 100

= [253,584 ÷ 7,035,600] x 100

= 0.036 x 100

= 3.6%

Therefore, Profit Margin is 3.6%

Basic Earning Power (BEP) is calculated through dividing the EBIT of the XYZ of 2013 with the Total Assets of the firm during 2013. Considering the given data, BEP is as follow:

EBIT of XYZ of 2013 ÷ Total Assets of the firm during 2013

= 492,648 ÷ 3,497,152

= 0.14

Therefore, BEP of XYZ is 0.14

Return on Assets (ROA) is calculated through dividing the Net Profit of the XYZ of 2013 with the Total Assets of the firm during 2013. Considering the given data, ROA is as follow:

Net Profit of XYZ of 2013 ÷ Total Assets of the firm during 2013

= 253,584 ÷ 3,497,152

= 0.072

Therefore, ROA of XYZ is 0.072

Return on Equity (ROE) is calculated through dividing the Net Profit of the XYZ of 2013 with the Equity of the firm during 2013. Considering the given data, ROA is as follow:

Net Profit of XYZ of 2013 ÷ Equity of the firm during 2013

= 253,584 ÷ 1,721,176

= 0.147

Therefore, ROE of XYZ is 0.147

- Calculate the 2013 price/earnings ratio, and market/book ratio.

Price/Earning Ratio of 2013 of XYZ can be calculated through dividing the Stock Price of the firm during 2013 with the EPS. Considering the given values of the firm, Price/Earning is as follows:

## Inventory Turnover Ratio

Stock Price ÷ EPS

= 12.17 ÷ 1.014

= 12

Therefore, Price/Earning of XYZ during 2013 is 12

Market/Book Ratio of 2013 of XYZ can be calculated through dividing the Stock Price of the firm during 2013 with the BVPS. Considering the given values of the firm, Price/Book Ratio is as follows:

Stock Price ÷ BVPS

= 12.17 ÷ 7.809

= 1.55

Therefore, Market/Book Ratio of XYZ during 2013 is 1.55

- Use the extended DuPont equation to provide a summary and overview of XYZ’s financial condition as projected for 2013.

DuPont analysis can be calculated through multiplying the Net Profit Margin (NPM) with Total asset turnover ratio (TATR) and Equity Multiplier (EM).

NPM = Net income ÷ Sales

= 253,584 ÷ 7,035,600

= 0.036

TATR = Sales ÷ Total Assets

= 7,035,600 ÷ 3,497,152

= 2.012

EM = 1 + (Total Debt ÷ Total Common Equity)

= 1 + (1,544,800 ÷ 1,952,352)

= 1 + 0.7912

= 1.791

Therefore, ROE = NPM x TATR x EM

= 0.036 x 2.012 x 1.791

= 12.97%

Extended DuPont can be calculated though multiplying the (Net Income ÷ EBIT) with the (EBT ÷ Sales) and (EBIT ÷ EBT).

Net Income ÷ EBIT = 253,584 ÷ 492,648

= 0.5147

EBT ÷ Sales = 492,648 ÷ 422,640

= 1.1656

EBIT ÷ EBT = 422,640 ÷ 7,035,600

= 0.06

Thus, NPM = 0.1547 x 0.06 x 1.1656

= 0.036

Therefore, new NPM is 0.036

According to the extended analysis, it can be perceived that financial performance of the XYZ firm is fine. Besides this, calculated ratios highlight that the firm has fine financial condition and enhanced its performance over time. Moreover, good NPM showcase that expense of the firm are under control and with the debt utilization the firm is able to provide superior performance (Arora & Soni, 2015).

- Use the following simplified 2013 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change “ripple through” the financial statements (shown in thousands below) and influence the stock price?

Accounts receivable $878 Debt $1,545

Other current assets 1,802

Net fixed assets 817 Equity 1,952

Total assets $3,497 Liabilities plus equity $3,497

First, we need to calculate XYZ’s daily sales.

Daily sales = Sales / 365

Daily sales = $7,035,600 / 365

Daily sales = $19,275.62

Target A/R = Daily sales × Target DSO

Target A/R = $19,276 × 32

Target A/R = $616,820

Freed-up cash = old A/R – new A/R

Freed-up cash = $878,000 – $616,820

Freed-up cash = $261,180

With reduction in DSO, it can be traced that the firm is performing well in order to enhance the cash position of the organization. Besides this, it will highlight increase in the stock price on behalf of the firm.

Now, according to the given information, if the DSO increases to 45 days, then the firm will be worse off. Performance of the firm will be below average compared to the market average and besides this it can also be envisaged that the firm is not trying enough to reduce the DSO of the firm. It will further result in reduced profit as well as stock price will be reduced eventually.

- Provide a brief summary or rationale of how these ratios are used, and why they are important.

All the key indicators calculated here, are beneficial to assess the performance of a firm. Using these key instruments XYZ firm will be able to trace its production and amount of money return for further investment. With the help of the current ratio, liquidity of a firm can be judged and besides this it can aid to trace the ability to pay short-term liabilities with their short-term assets (Tayeh, Al-Jarrah & Tarhini, 2015). On the other hand quick ratio is one of the liquidity ratios that help to sieve the current ratio through assessing the liquid current assets with current liabilities (Ogiela & Ogiela, 2015). Assets number and inventory are key indicators of a firm to portray its stock position. Besides this, it also highlights whether the firm has excess inventory, which has high liability and may lead to frozen cash (Vernimmen et al., 2014). In addition to this these instrumental ratios will guide the firm whether it needs price reduction with aging inventory. With the Times-Interest-Earned Ratios the firm can assess its proportionate income, which is required to cover the future interest expenses. Thus, using this the firm can make it financially stable and sustainable.

Reference:

Arora, A., & Soni, T. K. (2015). Financial performance of socially responsible firms: A Comparative Study of MNCs and Non-MNCs.

Ogiela, L., & Ogiela, M. R. (2015). Management information systems. In Ubiquitous Computing Application and Wireless Sensor (pp. 449-456). Springer, Dordrecht.

Tayeh, M., Al-Jarrah, I. M., & Tarhini, A. (2015). Accounting vs. market-based measures of firm performance related to information technology investments.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.