1.Use financial statements that are in the attached document to calculate the fi

Question

1.Use financial statements that are in the attached document to calculate the financial ratios presented.
2. Prepare and interpret an analysis of the financial ratios showing the company.
3. Summarize the findings and make recommendations.
4. Du Pont method is used to determine the return on equity. This result tells us?

Zumba Production Inc.

Income Statement

Year Ended December 31,2017

Zumba Production Inc.

Balance Sheet

Year Ended December 31, 2017

The following financial ratios are presented according to the market where it competes Zumba Production Inc.

Sales $160,000 Cost of Goods Solds: Merchandise Inventory, Jan 1,2013 $208,400 Purchases (net) 37,320 Goods Available for Sale $171,080 Merchandise Inventory, Dec. 31, 2013 65,080 Cost of Goods Sold 106,000 Gross Profit $54,000 Operating Expenses 37,000 Income from Operations $17,000 Other Income and Expense: Interest Expense 6,1000 Income before Tax $10,900 Income Tax Expense 4,360 Net Income $6,540

Explanation / Answer

Ratio

1/2/3.

Ratio

Market Zumba Production Remarks & Suggestions a. Current ratio 1.8 1.04 Is lower than competitor though theretically ok. Cash may be locked in hogher inventory and higher collection period which need improvement b. Quick ratio 0.7 0.384 Lower than competitor due to high inventory level in current asset. Inventory level to be reduced. c. Inventory turnover * 2.5 2.33 Lower than competitor due to high inventory level in current asset. Inventory level to be reduced. d. Average collection period * 37.5 days 57.03 days Lower than competitor causing lesser liquidity. Vey important to reduce the period. e. Debt ratio 65% 40% Lower than competitor , interest charge lower. f. Times interest earned ratio 3.8 2.79 Lower operational income reduced coverage g. Gross profit margin 38% 34% Lower than competitor, either sale price or COGS needs to be improved h. Net profit margin 3.50% 4% Better than competitor i. Return on total sales 4.00% 4% j. Return on common equity 9.50% 11% Better than competitor. Indicates better use of asstets and funds. k. Market/ Book ratio 1.1 l. Working Capital $5,000 3,000 wc requirement is less than competitor, good for operational purpose. *Based on 365 days a year Du Pont formula of ROE 4 ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier(Assets/Equity) = 4% *160,000/150,000*150,000/58,050 11% So the result is same

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