Storm Weather Industries manufactures weather equipment. Selected financial data
ID: 2459470 • Letter: S
Question
Storm Weather Industries manufactures weather equipment. Selected financial data for Storm Weather is presented below; use the information
Current Assets As of Dec. 31, 2012 Dec. 31, 2011
Cash and cash equivalents $ 376,843 $ 205,088
Marketable Securities 166,106 187,064
Accounts Receivable (net) 258,387 289,100
Inventories 424,493 391,135
Prepaid Expenses 55,369 25,509
Other current assets 83,053 85,029
Total Current Assets 1,364,251 1,182,925
Plant Property and Equipment 1,384,217 625,421
Long-Term Investment 568,003 425,000
Total Assets $3,316,471 $2,233,346
Current Liabilities Short-term borrowings $ 206,376 $ 70,419
Current portion of long-term debt 155,000 168,000
Accounts payable 254,111 286,257
Accrued liabilities 273,658 166,983
Income taxes payable 97,735 178,911
Total Current Liabilities 986,880 870,570
Long-Term Debt 500,000 300,000
Deferred Income Taxes 215,017 262,404
Total Liabilities 1,701,897 $1,432,974
Common Stock $ 425,250 $ 125,000
Additional Paid-in Capital 356,450 279,951
Retained Earnings 832,874 395,421
Total Stockholders' Equity 1,614,574 800,372
Total Liabilities and Stockholders' Equity $3,316,471 $2,233,346
Selected Income Statement Data - for the year ending December 31, 2012:
Net Sales $4,685,340
Cost of Goods Sold (2,942,353)
Selling Expenses (884,685)
Operating Income 858,302
Interest Expense (45,240)
Earnings before Income Taxes 813,062
Income Tax Expense (325,609)
Net Income $ 487,453
Selected Statement of Cash Flow Data - for the year ending December 31, 2012:
Cash Flows from Operations $1,256,084
Capital Expenditures $745,862
What is your overall assessment of the company’s credit risk from the analyses of the financial data, provided? Explain.
Explanation / Answer
Ratio analysis is an excellent technique for gauging the credit risk of the company, and the following four liquidity ratios would be helpful:
a. Current ratio
b. Quick ratio
c. Receivables turnover
d. Inventory turnover
e.Payables turnover
a. Current ratio = Current Assets / Current Liabilities = 1,364,251 / 986,880 = 1.38
b. Quick ratio = Current assets - Inventories - Prepaid expenses / Current liabilities = 884,389 / 986,880 = 0.90
c. Receivables turnover = Net Sales / Average receivables = 4,685,340 / 273,744 = 17.12 times
d. Inventory turnover = Cost of goods sold / Average inventory = 2,942,353 / 407,814 = 7.21 times
e. Payables turnover = Cost of goods sold / Average accounts payable = 2,942,353 / 270,184 = 10.90 times
Overall assessment of the company's credit risk is that the company manages its working capital rather well. The receivables turnover is very high, though the inventory turnover is somewhat less brisk. The inventory conversion period is 365 / 7.21 or about 51 days, which seems to be a little sluggish, but maybe the product is such that the manufacturing process is lengthy. What is most impressive is the high accounts payable turnover, in spite of the tardy inventory conversion period.
While net income is $ 487,453, cash flows from operations is a very robust $ 1,256,084, which could be attained largely due to excellent working capital management.
Leverage is also at very reasonable levels. Debt equity ratio is 500,000 / 2,447,448 or about 0.20. Therefore financial risk is also currently very low. Plus times interest earned ( Operating income / interest expense) is a very healthy 19 times.
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