Weekly Management meeting in Accounting:
Sue Sims (controller): I really need you to analyze Winco Construction Company and see if we should extend them credit for this project we are deciding upon. I want you to analyze their financial statements and review their financial ratios (liquidity, solvency, efficiency, profitability and market ratios). We really need to insure that this customer is worthy of credit and can pay for our services.
Scenario Steps to Completion
You are to analyze various aspects of a customer firm and our firm; Stirm Windows Inc. and to perform various financial analysis tasks associated with the customer firm Winco Const. to ensure their financial strength is sufficient to justify several large orders received from the firm and an investment in the firm itself.
Some basic statistics are needed to assess the firm’s financial health, given the amount of business the two firms transact.
Calculate the appropriate ratios which should include the Dupont ratio among others.
Place the numbers into the following context of questions that Sue wants answered:
Are these ratios sufficient enough for you to evaluate our customer?
What do you conclude about the firm’s financial health and any change from 2013 to 2014?
Is this a firm we would feel comfortable extending significant credit to in the future?
We are also looking to take a minority ownership position in Winco Const. and need a profitability analysis. Use the decomposed Dupont model to analyze the drivers (return on assets, profit margin, debt/leverage) of Winco’s return on equity (ROE) for 2014. What can you conclude about the drivers of Winco’s ROE?
Concept Check: Ratios are simply the relationship between two variables. Keep in mind where the numbers are coming from in the financial statements and think about how these variables relate to one another and what the result shows in general before we look at the specific company.
Helpful Hint: When calculating financial ratios you need to place them in context of either; a competitor, previous year’s results or to industry benchmarks. A single ratio merely shows a relationship between two variables.
The financial statements are provided below:
Winco Construction Inc.
2014 Income Statement
($ in millions)
Net sales $8,450
Less: Cost of goods sold 7,240
Less: Depreciation 400
Earnings before interest and taxes 810
Less: Interest paid 70
Taxable Income $ 740
Less: Taxes 259
Net income $ 481
Winco Construction Inc..
2013 and 2014 Balance Sheets
($ in millions)
2013 2014 2013 2014
Cash $ 120 $ 140 Accounts payable $1,110 $1,120
Accounts rec. 930 780 Long-term debt 840 1,210
Inventory 1,480 1,520 Common stock 3,200 3,000
Total $2,530 $2,440 Retained earnings 530 710
Net fixed assets 3,150 3,600
Total assets $5,680 $6,040 Total liabilities & equ $5,680 $6,040
Average Industry Ratios
Lower Quartile Median Upper Quartile
Day’s sales in receivables 60 40 30
Cash Coverage ratio 2.0 10.0 18.0
Debt ratio 1.00 .90 0.80
Return on Equity 13 14.0 15.0