Based on the financial statements of Brown Company, calculate the following rati
ID: 2470694 • Letter: B
Question
Based on the financial statements of Brown Company, calculate the following ratio for 2009. (please note you should not use 2007 values for calculation) Profitability ratios: return on equity; return on assets: profit margin; gross profit margin; and general overhead ratio; Solvency ratios: Debt to equity; leverage multiplier; quick ratio; current ratio; times interest earned ratio; Activity ratios: Asset turnover; working capital turnover; inventory turnover; account receivable collection period; account payable collection period; Using the DuPont method, identify the components that contribute most to the observed change in Brown's return on equity from 2007 to 2009. State the reasons for the observed change. Evaluate the company's bankruptcy risk using Z-score.Explanation / Answer
a) Profitability Ratios
Return on Equity:- Income/ Equity*100
therefore :- 1860/2300+1996 *100
= 43.30%
Return on Assets:- net Income/ Average assets*100
Therefore:- 1860/23700*100
since opening balance of assets not available for the year 2009 so use the assets value at the last
= 7.85%
Profit Margin= Net Income/Net sales*100
therefore = 1860/19000*100
=9.79%
Gross Profit Margin= Revenue(Sales)- Cost of goods sold/ revenue
therefore ,19000-12000/19000 *100
=36.84%
Overhead ratio = Operating Expenses / Revenue*100
= 2500/19000*100
=13.16%
b)
debt equity rato:-
15004/4296
=3.493
leverage multiplier
= assets/ equity
=23700/4296
=5.52
Quick Ratio:-
current assets - inventory -prepaid expenses/ current laibilities
=9900-4200/4400
=1.30
Current ratio:-
current assets / current laibities
=9900/4400
=2.25
times Interest earned Ratio:-
Ebit/ interest Expense
=4500/1200
=3.75
Asset Turnover = Sales or Revenues / Total Assets
19000/23700
=.802
working capital turnover ratio
=net sales / working capital
working capital=current assets -current laibilities
=9900-4400
=5500
=19000/5500
=3.45
Inventory Turnover =Cost of Goods Sold ÷ Average Inventory
=12000/4200
=2.86
account receivable collection period
=Average accounts receivable
Annual sales ÷ 365 days
=3500/19000÷365
=67.24
account payable collection period
Total supplier purchases
Payable
since purchase are missing so assume COGS as purchases
=12000/2640
=4.54
d)
DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
ROE for 2009 = Profit Margin (Profit/Sales) * Total Asset Turnover(Sales/Assets) * Equity Multiplier (Assets/Equity)
=1860/19000*19000/23700*23700/4296
=.098*.802*5.52
=.434
ROE for 2007 = Profit Margin (Profit/Sales) * Total Asset Turnover(Sales/Assets) * Equity Multiplier (Assets/Equity)
=900/12000*12000/22000*22000/3000
=.075*.54*7.33
=.30
Profit margin shows the operating efficiency, asset turnover shows the asset use efficiency, and leverage factor shows how much leverage is being used. Since Roe increased from 2007 to 2009 Major contibutor is Equity Multiplier.
e)
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets
=1.2*5500/23700+4.1*1996/23700+3.3*4500/23700+0.6*2300/19404+1.0*19000/23700
=0.276+0.345+0.627+0.0711+0.802
=2.1211
the lower the score, the higher the odds are that a company is headed for bankruptcy. A Z-score of lower than 1.8, in particular, indicates that the company is heading for bankruptcy. Companies with scores above 3 are unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a gray area. so Brown Co in not having such risk.
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