Question: Gardems was recently hired as a financial analyst by Taylor, Inc., which is a Pennsylvania based company. His first task is to conduct a financial statement analysis of firm covering the past 2 years.
|
Balance Sheets
|
2012
|
2011
|
|
Cash
|
$52,000
|
57,600
|
|
Accounts receivable
|
402,000
|
351,200
|
|
Inventory
|
836,000
|
715,200
|
|
Total current assets
|
$1,290,000
|
$1,124,000
|
|
|
|
|
|
Gross fixed assets
|
$527,000
|
$491,000
|
|
Less: Accumulated depreciation
|
166,200
|
146,200
|
|
Net fixed assets
|
$360,800
|
344,800
|
|
Total assets
|
$1,650,800
|
$1,468,800
|
|
|
|
|
|
Accounts payable
|
$175,200
|
$145,600
|
|
Notes payable
|
225,000
|
200,000
|
|
Accruals
|
140,000
|
136,000
|
|
Total current liabilities
|
$540,200
|
$481,600
|
|
Long-term debt
|
424,612
|
$323,432
|
|
Common stock
|
460,000
|
460,000
|
|
Retained earnings
|
225,988
|
203,768
|
|
Total equity
|
$685,988
|
$663,768
|
|
Total Claims
|
$1,650,800
|
$1,468,800
|
|
|
|
|
|
INCOME STATEMENTS
|
|
|
|
Sales
|
$3,850,000
|
$3,432,000
|
|
Cost of goods sold
|
3,250,000
|
2,864,000
|
|
Other expenses
|
430,300
|
340,000
|
|
Depreciation
|
20,000
|
18,900
|
|
EBIT
|
$ 149,700
|
$209,100
|
|
Interest expense
|
76,000
|
62,500
|
|
EBT
|
$73,700
|
146,600
|
|
Taxes (40%)
|
29,480
|
58,640
|
|
Net income
|
$44,220
|
$87,960
|
|
|
|
|
|
OTHER DATA
|
|
|
|
December 31 stock price
|
$6.00
|
$8.50
|
|
Number of shares outstanding
|
100,000
|
100,000
|
|
Dividend per share
|
$0.22
|
$0.22
|
|
Annual lease payment
|
$40,000
|
$40,000
|
|
Earnings per share
|
$0.442
|
$0.880
|
Gardems also developed the following industry average data for 2012:
|
Ratio
|
Industry Average
|
|
Current
|
2.7
|
|
Quick
|
1.0
|
|
Inventory Turnover
|
7.0
|
|
Days sales outstanding (DSO)
|
32.0 days
|
|
Fixed asset turnover
|
10.7
|
|
Total asset turnover
|
2.6
|
|
Debt ratio
|
50.0%
|
|
Times Interest Expense
|
2.5
|
|
Profit margin
|
3.5%
|
|
Basic earning power
|
19.1%
|
|
ROA
|
9.1%
|
|
ROE
|
18.2%
|
|
P/E
|
14.2
|
How should Gardems interpret this financial information?
Gardems is thinking along the following lines on this case
a. Prepare an executive summary of your findings.
b. Prepare a statement of cash flows for the firm for 2012.
c. Assess the firm's liquidity position.
d. How do the firm's asset management ratios stack up against the industry averages?
e. Calculate firm's profitability ratios.
f. Apply the Du Pont analysis to 2012 and 2011 data to obtain a general overview of the firm's financial
condition.
Gardems thinks that financial statement analysis can provide some useful information concerning a company's operations and financial conditions, yet it does have some inherent problems and limitations that necessitate care and judgement. Discuss the most important of these problems and limitations.