The purpose of the third part of the comprehensive project is to use resources available to obtain industry averages for commonly used ratios. Additionally, you will compare company ratio results to industry averages.
- Obtain the four-digit primary SIC (Standard Industrial Classification) Code and industry title for your company. Record the primary SIC code and industry title at the top of the Ratio Analysis Worksheet.
- Obtain industry averages for commonly used ratios in the current period. Industry average information is reported by industry title or SIC code.
Look up the following industry-average ratios:
- Current ratio
- Debt ratio
- Gross profit margin
- Times interest earned
- Accounts receivable turnover
- Inventory turnover
- Return on Sales
- Asset Turnover
- Return on Assets
- Financial Leverage
- Return on Equity
Note that some industry averages may not apply to your company.
Alternative to Industry Averages:
If you are not able to find the industry average for part 3 of your project, please consider the following:
Unfortunately, some of the websites where you can find industry averages will require you to pay for them. Instead of using industry average, calculate the same ratios for one of the competitors to the company you used in your project. That will give you the comparative information you need for Part 3 of the project. I believe this will help.
- Write a 3-5 page report comparing the above ratios to industry averages. Discuss whether your company’s profitability, efficiency, liquidity, and solvency are better than, or worse than, its peers. The report should be well written with cover page, introduction, body of paper (with appropriate subheadings), conclusion, and reference page. References must be appropriately cited. Format: Double-spaced, one-inch margins, using a 12-point Times New Roman font.
The purpose of the third part of the comprehensive project is to use resources available to obtain industry averages for commonly used ratios. Additionally, you will compare company ratio results to i
10| Page Part 1: Financial Statements A. Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017. The company paid $11,000 dividend in 2017. B. Prepare the balance sheet for 2016 and 2017 C. Prepare Common-Size financial statements of income statement and balance sheet. D. Prepare Statement of Cash Flows. Income statement for the year ended on 31 December 2017 Amount in $ Particulars 2017 2016 Sales 5834400 3432000 Cost of goods sold -4980000 -2864000 Depreciation -116960 -18900 Other expenses -720000 -340000 Total expenses -5816960 -3222900 Profit/loss before tax 17440 209100 Less Interest expense 176000 62500 Earnings before taxes -158560 146600 Current tax @40% -63424 58640 Net Income / loss -95136 87960 Dividend 11000 22000 Balance sheet as on 31 December 2017 Amount in $ Assets 2017 2016 Non-current assets Fixed assets 1202950 491000 accumulated depreciation -263160 -146200 939790 344800 Current assets Cash 7282 9000 Accounts receivable 632160 351200 Inventory 1287360 715200 short term Investments 20000 48600 1946802 1124000 Total assets 2886592 1468800 Equity & Liabilities Equity share 460000 460000 Retained earnings 97632 203768 557632 663768 Noncurrent Liability Long term debt 1000000 323432 Current liability Accounts payable 324000 145600 Notes payable 720000 200000 Accruals 284960 136000 1328960 481600 Total Liabilities 2886592 1468800 Statement of retained earnings 2017 Balance at beginning of year 2016 203768 Profit / loss for the year -95136 Dividend for the year -11000 Balance at year end 97632 Statement of cash flow Amount in $ Particulars 2017 Operating activities Net income -95136 Noncash adjustment Depreciation 116960 Changes in working capital Change in AR -280960 Changes in Inventory -572160 change in AP 178400 Change in accounts 148960 Net cash provided by operating activities -503936 Investing activities Cash used to buy assets -711950 short term investment 28600 Net cash provided by investing activities -683350 Financing activities Changes in notes payable 520000 changes in long term debt 676568 payment of cash dividend -11000 Net cash provided for financing activities 1185568 Net change in cash and cash equivalent -1718 cash at beginning of the year 9000 cash at end of the year 7282 Part 2: Financial statement analysis A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation needs to show the excel formula Current ratio Quick ratio Inventory turnover (times) Average collection period (days) Total asset turnover (times) Debt ratio Times interest earned Gross profit margin Net profit margin Return on total assets Return on equity P/E ratio Return on equity using DuPont Analysis B. Comments on the ratios by comparing 2016 to 2017 ratios. C. Assume Adams Stores, Inc. is a retail company similar to Walmart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially? Ans: A: S. No Ratio 2016 2017 Current Ratio 6.189 1.44 Quick Ratio 2.25 0.47 Inventory turnover(times) 4.00 3.74 Average Collection period(days) 0.000 0.000 Total asset turnover(times) 2.132 2.0212 Debt ratio 0.3278 0.4603 Times Interest earned 3.3456 0.099 Gross profit margin 1.655 0.1464 Net profit margin 0.0256 0.01636 10 Return on total assets 0.05988 0.0329579 11 Return on equity 0.1912 0.2068 12 P/E ratio 2.257 4.7115 13 Return on equity using DuPont Analysis 0.012 0.00806 B. since the company is having the sales of $3432000 in the year 2016 and the sales of $5834400 in the year 2017 that means it is indicating the growth of 70% in the sales on YOY basis. So, it can be assumed from the sales level that the company is increasing exponentially. C. The normal growth rate in retail industry is around 8% marketwise and the company is execution very well as associate to the organization average that will lead the company to value more than its book value. Part 3: Break-even, Financial and Operating Leverages ITEM COST Sales (40,000 bags at $50 each) $2,000,000 Less: Variable costs (40,000 bags at $25) $1,000,000 Contribution $1,000,000 Less: Fixed cost $600,000 Earnings before interest and taxes (EBIT) $400,000 Less: Interest expense $120,000 Earnings before taxes (EBT) $280,000 Less: Income tax expense (20%) $56,000 Net Income $224,000 Based on the information above, calculate (show all calculations and responses in good form): A. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning? B. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning? C C. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning? Ans: Finding the breakeven point: We can calculate this in terms of units or dollars In units = =600,000/($50-$25) = 600000/25 = 24,000 bags In dollars = But P/V ration = = = = 0.5 Therefore, becomes = = 1,200,000 At breakeven, the revenue is equal to the expenses, this means that the organization is not making a profit. If I were the manager, I will consider analyzing the whole system and check the cost of producing a bag of maize. If I find that I will be making a profit by production of more bags, then I will go on and produce beyond the breakeven point. The degree of financial leverage (DFL) is given by = 1.43 The financial leverage measures the value of equity in a company. It’s the overall debt load a company has compared to the assets the company owns. The higher the degree of financial leverage, the more volatile the earnings will be. Since the above figure passes the o.5 mark, it is considered a high DFL. As a manager, I will use this number to minimize the borrowings and look for other sources of capital so that the revenue can be higher than interests paid to the loans. Degree of Operating Leverage (DOL) =2.5 The degree of operating leverage helps the company to understand the effects of operating leverage on the company’s probable earnings. A high DOL indicates that the costs cannot be scaled down when the sales are declining. This is a risk because even a small decrease in sells can trigger massive loses and offsets the company from making a profit. Group Kuestion1}