Balance Sheets 2006 2005 Assets Cash $ 52,000 $ 57,600 Accounts receivable 402,0
ID: 1172351 • Letter: B
Question
Balance Sheets 2006 2005
Assets
Cash $ 52,000 $ 57,600
Accounts receivable 402,000 351,200
Inventories 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
Liabilities and Equity
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 (100,000 shares) 460,000 460,000
Retained earnings 225,988 203,768
Total equity $ 685,988 $ 663,768
Total liabilities and equity $1,650,800 $1,468,800
Income Statements 2006 2005
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)
Total operating costs $3,700,300 $3,222,900
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
EPS $0.442 $0.880
Statement of Cash Flows (2006)
Operating Activities
Net income $ 44,220
Other additions (sources o f cash)
Depreciation 20,000
Increase in accounts payable 29,600
Increase in accruals 4,000
Subtractions (uses of cash)
Increases in accounts receivable ( 50,800)
Increase in inventories (120,800)
Net cash flow from operations $( 73,780)
Long-Term Investing Activities
Investment in fixed assets $( 36,000)
Financing Activities
Increase in notes payable $ 25,000
Increase in long-term debt 101,180
Payment of cash dividends ( 22,000)
Net cash flow from financing $104,180
Net reduction in cash account $( 5,600)
Cash at beginning of year 57,600
Cash at end of year $ 52,000
Other Data 2006 2005
December 31 stock price $6.00 $8.50
Number of shares 100,000 100,000
Dividends per share $ 0.22 $0.22
Lease payments $40,000 $40,000
Ratio Industry Average 2006
Current 2.7x
Quick 1.0x
Inventory turnover 6.0x
Days sales outstanding (DSO) 32.0 days
Fixed assets turnover 10.7x
Total assets turnover 2.6x
Debt ratio 50.0%
TIE 2.5x
Fixed charge coverage 2.1x
Net profit margin 3.5%
ROA 9.1 %
ROE 18.2%
Price/earnings 14.2x
Market/book 1.4x
. Begin by reviewing briefly what balance sheets and income statements are. Then give an overview of the statement of cash flows. Explain that some data (net income, depreciation, and dividends) come fro m the income statement, while the other items reflect differences between balance sheet accounts and thus show changes in those accounts between the two dates.
2. Compute HHCs current and quick ratios , and then compare them with industry (cross - sectional analysis) and its past (Trend analysis). You must interpret results.
3. Compute all the ratios to evaluate its asset management, and then compare them with industry (cross - sectional analysis) and its past (Trend analysis). You must interpret results.
4. Compute all the ra tios to evaluate its debt management, and then compare them with industry (cross - sectional analysis) and its past (Trend analysis). You must interpret results.
Compute all the ratios to evaluate its profitability, and then compare them with indus try (cross - sectional analysis) and its past (Trend analysis). You must interpret results.
Explanation / Answer
Balance sheet is the financial statement which shows the position of assets and liabilities as on a position date of a company. It shows how are assets source. The total of liabilities will be equal to total of assets because every transaction has double impact. Income statement of a company represents the revenue and expenses for a period. The income statement helps us to understand whether the company is proft making or loss making. Cash flow statement reflects the flow of cash from operating activity, investing activity and financing activity. Cash received from any of the activity is added and any expenditure is deducted to the opening balance of cash to caculate the closing balance. The cash flow statement calculation begins with profit before taxes and depreciation of assets is added back as this being a non cash expense, also adjusted are made for change in current assets and liabilities to reflect correct details of cash flow from operating activities.
2005 2006 Industry Average 2006 Current Ratio = Current Assets/Current Liabilities Current assets 1124000 1290000 Current liabilities 481600 540200 Current Ratio 2.333887043 2.388004443 2.70x Current Ratio = Current Assets/Current Liabilities Current ratio is the liquidity ratio, it measures whether the company will be able to pay its liailities which are due within 1 year from its current assets. HCCs current ratio has increased from 2005 to 2006 showing improve in liquidity but its current ratio is less than the industry average which means the company has to improve its current ratio Quick Ratio = Current assets- inventories/Current Liabilities (1124000-715200)/481600 (1290000-836000)/540200 0.848837209 0.840429471 1 Quick ratio is also a liquidity ratio, in this ratio we compare the current liabilities with the quick funds on hands i.e whether the quick funds in hand are sufficient to pay of the liability. The ideal quick ratio is 1.1 i.e. for every liability it has equivalent quick funds to pay. HCCs quick ratio is less than 1 showing major portion is being blocked in inventory, also the ratio has dropped in 2006 as compared to 2005 Inventory Turnover = Sales/inventory 3432000/715200 3850000/836000 4.798657718 4.605263158 6 Inventory turnover is the number of time taken to convert the goods into sale and replace again with inventory. Higher this ratio the better it is. HCC's inventory turnover ratio is less than the industry average of 6 Days Sales Outsanding = Accounts receivable/(Sales/365) 351200/(3432000/365) 402000/(3850000/365) 32 days This ratio tells us how many days it takes for the company to receives money from its debtors. HCC generally take more days than the industry average to collect money from its debtors 37.35081585 38.11168831 32 days Fixed assets turnover = Net Sales/Fixed assets 3432000/344800 3850000/360800 10.7x This ratio measures the efficiency of the company in utilising its assets for generating the revenue. Higher the ratio, the better it is. HCCs ratio has improved from 2005 to 2006 but it less than the industry average 9.953596288 10.67073171 10.7x Total assets turnover = Net Sales/Total assets 3432000/1468800 3850000/1650800 2.6 The ratio measures the ability of the company to make sales from its total assets. HCC total asset turnover ratio has improved in 2006 and is less than the industry standard 2.34 2.33 2.6 Debt ratio = Total Debt/Total Assets 323432/1468800 424612/1650800 50% This ratio measures how much of the assets of the company are financed by the long term debts. The lower the ratio the better it is. The company has better debt ratio as compared to industry standard 22.02% 25.72% 50% TIE = EBIT/Total Interest payable 209100/62500 149700/76000 2.5x The ratio measures the ability of the company to meet its interest payments. HCCs TIE ratio has drop in 2006 and is less than the industry average 3.3456 1.969736842 Fixed charge coverage = EBIT + Lease expense/Lease expense + Interest expense (209100+40000)/(40000+62500) (149700+40000)/(40000+76000) 2.1x The ratio measures the ability of the company to meet its fixed charges. HCCs Fixed charge coverage ratio has drop in 2006 and is less than the industry average 2.430243902 1.635344828 Net profit margin = Net Profit/Sales 87960/3432000 44220/3850000 This ratio measures the profitability of the company that is how much of the sale is converted into profit. The higher the ratio, the better the company is. There has been drop in net profit ratio from 2005 to 2006 also the net profit margin ratio is less than the industry average. 2.56% 1.15% 3.50% ROA = Net Income/Total Assets 87960/1468800 44220/1650800 This ratio measures the profitability of the business with its total assets. HCCs return on asset ratio is less than the industry average and the ratio has fallen in 2006 5.99% 2.68% 9.10% ROE = Net Income- dividend/Shareholder's equity (87960-(0.22*100000))/685988 (44220-(0.22*100000))/663768 18.20% This ratio measures the return on shareholders equity. HCCs return on asset ratio is less than the industry average and the ratio has fallen in 2006 0.096153285 0.033475552 Price/earnings = MPS/EPS 8.50/0.88 6/0.442 14.20x This ratio shows the relationship between a company's share price and its earning per share. This ratio helps to understand the value of a company. H 9.659090909 13.57466063 14.20x Market/book = MPS/BPS 8.5/4.60 6/4.60 This ratio is use to find the value of the company by comparing its market value with its book value. HCCs has lower ratio as compared to industry average and 2005 1.847826087 1.304347826 1.4xRelated Questions
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