You have just been hired as a financial analyst for Purple Power Company, a manu

Question

You have just been hired as a financial analyst for Purple Power Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Purple Power’s performance to its major competitors. The company’s financial statements for the last two years are as follows:

You gather the following financial data and ratios that are typical of companies in Purple Power Company’s industry:

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1) Compute the times interest earned ratio for both this year and last year.

2) Compute the debt-to-equity ratio for both this year and last year.

3) Compute the gross margin percentage for both this year and last year.

4) Compute the return on total assets for both this year and last year. Total assets at the beginning of last year were $12,960,000.

Purple Power Company Comparative Balance Sheet This Year Last Year Assets Current Assets: Cash $960,000 $1,260,000 Marketable Securities $0 $300,000 Accounts Receivable, Net $2,700,000 $1,800,000 Inventory $3,900,000 $2,400,000 Prepaid Expenses $240,000 $180,000 Total Current Assets $7,800,000 $5,940,000 Plant and Equipment, Net $9,300,000 $8,940,000 Total Assets $17,100,000 $14,880,000 Liabilities and Stockholders' Equity Liabilities: Current Liabilities $3,900,000 $2,760,000 Note Payable, 10% $3,600,000 $3,000,000 Total Liabilities $7,500,000 $5,760,000 Stockholders' Equity: Common Stock, $78 Par Value $7,800,000 $7,800,000 Retained Earnings $1,800,000 $1,320,000 Total Stockholders' Equity $9,600,000 $9,120,000 Total Liabilities and Stockholders' Equity $17,100,000 $14,880,000

Explanation / Answer

(840000/15990000**)*100=5.25%

**(14880000+17100000)/2=15990000

(504000/13920000**)*100=3.62%

**(12960000+14880000)/2=13920000

S.No. Formula This year Last Year 1 Times interest earned= Eaning before interest and Tax expense/Interest expense 1560000/360000=4.33 1020000/300000=3.4 2 Debt-to-Equity Ratio =Total Liabilities/Shareholders' Equity 7500000/17100000=0.44 5760000/14880000=0.39 3 Gross Margin%=Gross Profit/Revenue 3150000/15750000=0.2 2580000/12480000=0.21 4 Return on total assets= Net Income/Average Total Asset

(840000/15990000**)*100=5.25%

**(14880000+17100000)/2=15990000

(504000/13920000**)*100=3.62%

**(12960000+14880000)/2=13920000

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