Explain Analysis of the financial statements with comparison of industry averages
Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested its most recent financial statement as part of the loan package.
The industry in which Heartland operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose.
Heartland\'s controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication, and the averages for the past year, are as follows:
|
Ratio
|
Industry Average
|
|
Current ratio
|
1.23
|
|
Acid-test (quick) ratio
|
0.75
|
|
Accounts receivable turnover
|
33 times
|
|
Inventory turnover
|
29 times
|
|
Debt-to-equity ratio
|
0.53
|
|
Times interest earned
|
8.65 times
|
|
Return on sales
|
6.57%
|
|
Asset turnover
|
1.95 times
|
|
Return on assets
|
12.81%
|
|
Return on common stockholders\' equity
|
17.67%
|
The financial statements to be submitted to the bank in connection with the loan follow:
Heartland Inc.
Statement of Income and Retained Earnings
For the Year Ended December 31, 2007
(thousands omitted)
|
Sales revenue
|
$542,750
|
|
Cost of goods sold
|
(435,650)
|
|
Gross profit
|
$107,100
|
|
Selling, general, and administrative expenses
|
$(65,780)
|
|
Loss on sales of securities
|
(220)
|
|
Income before interest and taxes
|
$41,100
|
|
Interest expense
|
(9,275)
|
|
Income before taxes
|
$31,825
|
|
Income tax expense
|
(12,730)
|
|
Net income
|
$19,095
|
|
Retained earnings, January 1, 2007
|
58,485
|
|
|
$77,580
|
|
Dividends paid on common stock
|
(12,000)
|
|
Retained earnings, December 31, 2007
|
$65,580
|
Heartland Inc.
Comparative Statements of Financial Position
(thousands omitted)
|
|
2007
|
2008
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$1,135
|
$750
|
|
Marketable securities
|
1,250
|
2,250
|
|
Accounts receivables, net of allowances
|
15,650
|
12,380
|
|
Inventories
|
12,680
|
15,870
|
|
Prepaid items
|
385
|
420
|
|
Total current assets
|
$31,100
|
$31,670
|
|
Long-term investments
|
$425
|
$425
|
|
Property, plan, and equipment:
|
|
|
|
Land
|
$32,000
|
$32,000
|
|
Building and equipment, net of accumulated depreciation
|
216,000
|
206,000
|
|
Total property, plant, and equipment
|
$248,000
|
$238,000
|
|
Total assets
|
$279,525
|
$270,095
|
|
Liabilities and Stockholders\' Equity
|
|
|
|
Current Liabilities:
|
|
|
|
Short-term loans
|
$8,750
|
$12,750
|
|
Accounts payable
|
20,090
|
14,380
|
|
Salaries, wages, and other
|
1,975
|
2,430
|
|
Income taxes payable
|
3,130
|
2,050
|
|
Total current liabilities
|
$33,945
|
$31,610
|
|
Long-term bonds payable
|
$80,000
|
$80,000
|
|
Stockholders\' equity:
|
|
|
|
Common stock, at par
|
$100,000
|
$100,000
|
|
Retained earnings
|
65,580
|
58,485
|
|
Total stockholders\' equity
|
$165,580
|
$158,485
|
|
Total liabilities and stockholders\' equity
|
$279,525
|
$270,095
|
Question:
Prepare a columnar report for the controller of Heartland Inc., comparing the industry average for the ratio published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2007, or for the year ending December 31, 2007, whichever is appropriate