Using the financial statements for Happy Hamburger Company below: Calculate the
ID: 2742200 • Letter: U
Question
Using the financial statements for Happy Hamburger Company below:
Calculate the indicated ratios for Happy Hamburger.
Discuss Happy Hamburger’s strengths and weaknesses as revealed by your analysis.
Suppose Happy Hamburger doubles its sales as well as its inventories, accounts receivable, and common equity during the year. How would that information affect the validity of your ratio analysis?
Happy Hamburger Company Income Statement for the year ending December 31, 20XX
Sales 1,607,500
Cost of goods sold 1,392,500
Selling, general and administrative expenses 145,000
Earnings before interest and taxes (EBIT) 70,000 Interest expense 24,500
Earnings before taxes (EBT) 45,500
Federal and state income taxes (40%) 18,200
Net Income 27,300
Happy Hamburger Company Balance Sheet as of December 31, 20XX
Assets Liabilities and Shareholder Equity Cash 80,500
Accounts payable 132,000 Accounts Receivable 334,500
Current portion of debt 84,000 Inventories 240,500 Other current liabilities 114,000
Total current assets 655,000
Total current liabilities 330,000
Net fixed assets 292,500
Long-term debt 256,500
Total assets 947,500
Total Liabilities 586,500
Common equity 361,000
Total Liabilities & Equity 947,500
Happy Industry Hamburger Average
Current ratio 2.2
Days sales outstanding (based on 365 day year) 36 days
Inventory turnover 6.7
Fixed asset turnover 12.1
Total asset turnover 3.00
Return on sales 1.20%
Return on assets 3.60%
Return on equity 9.00%
Debt ratio 55%
Explanation / Answer
Current ratio= curr assets/ curr liab= 655000/330000= 1.98
Days sales outstanding= account recievable*365/sales= 76 days
inventory turnover= cogs/ average stock; for average stock, we need opening and closing stock of the year which is not mentioned in the question.
Fixed asset turnover=sales/fixed assets=1607500/292500= 5.495
Total asset turnover= sales/ total assets= 1607500/947500= 1.69
Return on sales= net profit/ revenue= 27300/1607500= 1.69%
Return on assers= net profit/ revenue= 27300/947500= 2.88%
Return on equity= net profity/ equity= 27300/361000= 7.56%
Debt ratio= debt/ total liabilities= 256500/947500= 27%
The company has a lower liquidity than industry average. The company has very high days sales outstanding compared to industry which indicates lower efficiency in sales and marketing of the company. Margins are maintained decently by the company and debt ratio is low too.
If the sales, inventories, accounts receivable, and common equity get doubled than the company would enjoy better net profit and the debt ratio would decrease even further.
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