All-Things Inc. manufactures a variety of consumer products. The company's founders have managed the company for thirty years and are now interested in selling the company and retiring. Trist Associates is looking into the acquisition of All-Things and has requested the company's latest financial statements and selected financial ratios in order to evaluate All-Things' financial stability and operating efficiency. The summary information provided by All-Things is presented below.
All-Things Inc
Income Statement
For the Year Ended May 31, Year 3
(in thousands)
|
Sales
|
$30,500
|
|
Expenses:
|
|
|
Cost of goods sold
|
17,600
|
|
Selling and administrative expense
|
3,050
|
|
Depreciation and amortization expense
|
1,890
|
|
Interest expense
|
900
|
|
Total expenses
|
23,440
|
|
Income before taxes
|
7,060
|
|
Income taxes
|
2,900
|
|
Net income
|
$ 4,160
|
All-Things Inc.
Comparative Statement of Financial Position
As of May 31
(in thousands)
|
Year 3
|
Year 2
|
|
Cash
|
$ 400
|
$ 500
|
|
Marketable securities
|
500
|
200
|
|
Accounts receivable, net
|
3,200
|
2,900
|
|
Inventory
|
5,800
|
5,400
|
|
Total current assets
|
9,900
|
9,000
|
|
Property, plant, and equipment, net
|
7,100
|
7,000
|
|
Total assets
|
$17,000
|
$16,000
|
|
Accounts payable
|
$ 3,700
|
$ 3,400
|
|
Income taxes payable
|
900
|
800
|
|
Accrued expenses
|
1,700
|
1,400
|
|
Total current liabilities
|
6,300
|
5,600
|
|
Long-term debt
|
2,000
|
1,800
|
|
Total liabilities
|
8,300
|
7,400
|
|
Common stock $(1 par value)
|
2,700
|
2,700
|
|
Paid-in-capital in excess of par
|
1,000
|
1,000
|
|
Retained earnings
|
5,000
|
4,900
|
|
Total stockholders' equity
|
8,700
|
8,600
|
|
Total liabilities and stockholders' equity
|
$17,000
|
$16,000
|
Selected Financial Ratios
|
|
Current
|
|
All-Things
|
Industry
|
|
Year 2
|
Year 1
|
Average
|
|
Current ratio
|
1.61
|
1.62
|
1.63
|
|
Acid-test ratio
|
0.64
|
0.63
|
0.68
|
|
Inventory turnover
|
3.17
|
3.21
|
3.18
|
|
Times interest earned
|
8.55
|
8.50
|
8.45
|
|
Debt-to-equity ratio
|
0.86
|
1.02
|
1.03
|
Required:
a. Calculate the above ratios for fiscal year Year 3 for All-Things Inc.
b. What do these ratios tell you about the company's operations and ability to take on additional debt?
c. Identify two limitations of ratio analysis.