Financial Statement Analysis

Ratio Analysis

EXERCISES/PROBLEMS

1. [ROA and ROE models and Ratio Components] The Salza Technology Corporation successfully increased its top line sales from $375,000 in 2015 to $450,000 in 2016. Net income also increased as did the ventures total assets. You have been asked to compare the financial performance between the two years.

Salza Technology Corporation

Annual Income Statements (in $ Thousands)

20152016Net sales$375$450Less: Cost of goods sold-225-270Gross profit150180Less: Operating expenses-46-46Less: Depreciation-25-30Less: Interest-4-4Income before taxes75100Less: Income taxes-20-30Net income$ 55$70

Cash dividends

$ 17

$ 20

Balance Sheets as of December 31 (in $ Thousands)

20152016Cash $ 39 $ 16 Accounts receivable 50 80 Inventories 151 204 Total current assets 240 300 Gross fixed assets 200 290 Less accumulated depreciation 95 125 Net fixed assets 105 165 Total assets $345 $465

Accounts payable

$ 30

$ 45

Bank loan2027Accrued liabilities 10 23 Total current liabilities60 95 Long-term debt1515Common stock85120Retained earnings185235Total liabilities and equity$345$465

1. [Liquidity and Financial Leverage Ratios] Refer to the Salza Technology Corporation in Problem 1.

1. Using average balance sheet account data, calculate the (a) current ratio, (b) quick ratio, (c) total-debt-to-total-assets ratio, and (d) the interest coverage ratio for 2016.

Using average account balances:

1. Current ratio: Average current assets/Average current liabilities

1. Quick ratio: (Average current assets Average inventories)/Average current liabilities

1. Total-debt-to-total-assets ratio: Average total debt/Average total assets

1. Interest coverage ratio: Average EBITDA/Average interest

1. Repeat the ratio calculations requested in Part A separately for 2015 and 2016 using year-end balance sheet account data. What changes, if any, have occurred in terms of liquidity and financial leverage?

1. Current ratio:

1. Quick ratio:

1. Total-debt-to-total-assets ratio:

1. Interest coverage ratio:

3. [Financial Statements and Ratios] Bike-With-Us Corporation, a specialty bicycle parts replacement venture, was started last year by two former professional bicycle riders who had substantial competitive racing experience including competing in the Tour de France. The two entrepreneurs borrowed $50,000 from members of their families and each put up $30,000 in equity capital. Retail space was rented and $60,000 was spent for fixtures and store equipment. Following are the abbreviated income statement and balance sheet information for the Bike-With-Us Corporation after one complete year of operation.

BIKE-WITH-US CORPORATION

Sales $325,000

Operating Costs 285,000

Depreciation 10,000

Interest 5,000

Taxes 6,000

Cash $1,000

Receivables 30,000

Inventories 50,000

Fixed Assets, Net 50,000

Payables 11,000

Accruals 10,000

Long-Term Loan 50,000

Common Equity 60,000

1. Prepare an income statement and a balance sheet for the Bike-With-Us Corporation using only the information provided above.

1. Calculate the current ratio, quick ratio, and NWC-to-total-assets ratio.

C. Calculate the total-debt-to-total-assets ratio, debt-to-equity ratio, and interest coverage

1. Calculate the net profit margin, sales-to-total-assets ratio, and the return on total assets.

1. Calculate the equity multiplier. Combine this calculation with the calculations in Part D to show the ROE model with its three components.

4. [Financial Ratios] Use the financial statements data for the Bike-With-Us Corporation provided in Problem 3 to make the following calculations.

A. Calculate the operating return on assets.

B. Determine the effective interest rate paid on the long-term debt.

C. Calculate the NOPAT margin. How does this compare with the results for the net profit margin? Did the owners benefit from the use of interest-bearing long-term debt?