Question
Marion has just received the year-end financial statements shown below. Evaluate the state of her company from the perspective of shareholders. What should Marion conclude based on this, and what possible actions can be recommended? Marion's, Inc. Income Statement 2012 Cash Flow Statement Revenue $3,906,000 Balance Forward $212,500 Returns, Credits, etc. ($1,400) Net Income $124,480 Net Sales (Revenue) $3,904,600 Depreciation $75,000 Direct Costs Change in Working Capital ($17,140) Labor ($1,450,000) Capital Expenditures ($70,000) Materials ($989,000) Financial Activities ($75,000) Cost of Goods Sold (COGS) ($2,439,000) Net change in cash $37,340 Gross Margin $1,465,600 Ending Cash Balance $249,840 Selling General and Admin. Marketing ($400,000) Research and Development ($350,000) Administration ($250,000) Other ($200,000) Depreciation ($75,000) S G & A ($1,275,000) Earnings Before Interest and Taxes (EBIT) $190,600 Interest Expense/Income ($35,000) Pre-tax Income $155,600 Income Tax @ 20% ($31,120) Net Income $124,480 Balance Sheets, 2011 Assets Liabilities Current Assets Current Liabilities Cash $249,840 Accounts Payable $125,000 Accounts receivable $60,160 Taxes Payable $10,000 Finished Goods Inventory $40,000 Total Current Liabilities $135,000 Materials Inventory $85,000 Long Term Liabilities Total Current Assets $435,000 Bank Loans @ 6% $125,000 Mortgage @ 4.5% $460,000 Long term Assets Total Long Term Liabilities $585,000 Buildings $1,050,000 Equipment and machines $80,000 Capital Stock $650,000 Other $100,000 Retained Earnings $295,000 Total Fixed Assets $1,230,000 Stockholders Equity $945,000 Total Assets $1,665,000 Total Liabilities and Stockholders equity $1,665,000 Current Stock Price $44.25 Current Outstanding Shares 5,000
Explanation / Answer
1. The company is profitable, a good start. Net income is approx 3.1% of sales, not overly impressive but OK.
2.The company is generating cash, another good sign (cash went up from 212.500 to 249,840.
3. Liquidity looks good with a quick ratio of 2.3 (should be at least 1 to 1)
4. Solvency looks good. EBIT covers interest expense by 5.4X
5, Asset turn looks good at 3904600/1665000 2.3 to 1.
6. If the shares outstanding are correct the stock looks ridiculously underpriced. Earnings per share are 124480/5000= 24.90. If the stock price is 44.25 this would imply a P/E ratio of less than 2.
