Silver Cloud Computing is a company that provides cloud computing services. The

Question

Silver Cloud Computing is a company that provides cloud computing services. The company commenced operations on March 1, 2016. It acquired financing from the issuance of common stock for $40,000,000 and issuance of 4% bonds that mature in 2026 for $30,000,000. The income statements and balance sheets for the first two years are provided in a separate Excel spreadsheet. All amounts are in thousands. Required: The Chief Executive Officer (CEO) is interested in increasing sales and decreasing expenses. You have been requested to prepare a report that provides analysis of the financial statements and recommendations to improve the financial performance of the company.

a. Days Sales Outstanding

b. Profit Margin

c. Asset Turnover

d. Return on Assets

e. Financial Leverage

f. Return on Equity

g. PPE Turnover

h. Total Liabilities to Equity

i. Times Interest Earned

SILVER CLOUD COMPUTINGG Income Statements For the Years Ended February 28, 2018 and 2017 fye 2/28/2018 (in thousands) fye 2/28/2017 (in thousands) Sales Sales Discounts Net Sales 225,000 3,375 221,625 200,000 2,500 197,500 Wages and Salaries Bad Debt Expense Depreciation Marketing Expense Occupancy Expense Research & Development Total Expenses 73,500 2,100 20,000 33,750 54,000 22,500 205,850 70,000 2,000 20,000 30,000 54,000 20,000 196,000 Income from Operations 15,775 1,500 Interest Expense 1,200 1,200 Income Before Taxes 14,575 300 Income Taxes (40%) 5,830 120 Net Income 8,745 180

Explanation / Answer

1) Calculation of ratios (All numbers in $'000)   

a) Days sales outstanding = Accounts Receivables/Net Sales per day

Feb. 28, 2017

Net Sales per day = Total Net Sales/365 days = $197,500/365 days = $541.09589041

Accounts Receivable = $16,000

Days sales outstanding = $16,000/$541.09589041 = 29.57 days or 30 days

Feb. 28, 2018

Net Sales per day = Total Net Sales/365 days = $221,625/365 days = $607.191780821

Accounts Receivable = $18,000

Days sales outstanding = $18,000/$607.191780821 = 29.64 days or 30 days

b) Profit Margin = Net income/Net sales

Feb. 28, 2017

Profit Margin = $180/197,500 = 0.09%

Feb. 28, 2018

Profit Margin = $8,745/221,625 = 3.95%

c) Asset Turnover = Net Sales/Average Total Assets

Feb. 28, 2017

Average Total Assets = (Opening Total Assets+Closing Total Assets)/2

= ($70,000+$78,300)/2 = $148,300/2 = $74,150

Asset Turnover = $197,500/$74,150 = 2.66 times

Feb. 28, 2018

Average Total Assets = (Opening Total Assets+Closing Total Assets)/2

= ($78,300+$93,755)/2 = $172,055/2 = $86,027.50

Asset Turnover = $221,625/$86,027.50 = 2.58 times

d) Return on Assets = Net Income/Total Assets

Feb. 28, 2017

Return on Assets = $180/$78,300 = 0.23%

Feb. 28, 2018

Return on Assets = $8,745/$93,755 = 9.33%

Analysis on the basis of above calculated ratios

The days sales outstanding is same for both the years (i.e. 30 days) and not changed. The profit margin of the company has substantially increase from 0.09% in the last year to 3.95% in the current year which shows the company's growth over the last year. The company's Asset turnover has decreased to 2.58 times in the current year (2018) from 2.66 times in the last year (2017). Similar to profit margin, retuen on assets has also substantially increase from 0.23% in last year to 9.33% in current year.

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