Problem - Comparison with 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 Inc. decides 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 Heartland's most recent financial statements 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 companies belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their financial statements to the association for this purpose.
Heartland's controller is aware the bank has access to this survey and is very concerned with how the company fared this past year compared to the rest of the industry. The ratios included in the publication this past year are as follows:
|
Ratio
|
Industry Average
|
|
Current ratio
|
1.23
|
|
Acid test (quick) ratio
|
0.75
|
|
Accounts receivables turnover
|
33 times
|
|
Inventory turnover
|
29 times
|
|
Debt-to- equity ratio
|
0.53 times
|
|
Interest earned
|
8.65 times
|
|
Return on sales
|
6.57%
|
|
Assets turnover
|
1.95 times
|
|
Return on assets
|
12.81%
|
|
Return on common stockholder's 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, 2008 (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 and 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, 2008 58,485
$77,580
Dividends paid on common stock (12,000)
Retained earnings December 31, 2008 $65,580
Heartland Inc. Comparative Statements of Financial Position (thousands omitted)
|
|
2008
|
2007
|
|
Assets
|
|
|
|
Current assets:
Cash
Marketable securities
Accounts receivable, net of allowances
Inventories
Prepaid items
Total current assets
Long term investments
Property, plant, and equipment:
Land
Buildings and equipment, net of accumulated depreciation
Total property, plant, and equipment
Total assets
|
$ 1,135
1,250
15,650
12,680
385
$ 31,100
$ 425
$ 32,000
216,000
$248,000
$279,525
|
$ 750
2,250
12,380
15,870
420
$ 31,670
$ 425
$ 32,000
206,000
$238,000
$270,095
|
|
|
|
|
Liabilities and Stockholder's Equity
|
|
|
|
Current liabilities:
Short term notes
Accounts payables
Salaries and wages payable
Income taxes payable
Total current liabilities
Long term bonds payable
Stockholders' equity:
Common stock, no par
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
|
$ 8,750
20,090
1,975
3,130
$ 33,945
$ 80,000
$100,000
65,580
$165,580
$278,525
|
$ 12,750
14,380
2,430
2,050
$ 31,610
$ 80,000
$100,000
58,485
$158,485
$270,095
|
Question - Prepare a columnar report for the controller of Heartland Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2008, or for the year ending December 31, 2008, whichever is appropriate.