Financial statement analysis The financial statements of Zach Industries for the
ID: 2745289 • Letter: F
Question
Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2015, follow.
Zach Industries Income Statement for the Year Ended December 31, 2015
revenue $160,000
Less: Cost of goods sold 106,000
Gross profits $ 54,000
Less: Operating expenses
Selling expense $ 16,000
General and administrative expenses 10,000
Lease expense 1,000
Depreciation expense 10,000
Total operating expense $ 37,000
Operating profits $ 17,000
Less: Interest expense 6,100
Net profits before taxes $ 10,900
Less: Taxes 4,360
Net profits after taxes $ 6,540
Zach Industries Balance Sheet December 31, 2015
Assets
Cash $ 500
Marketable securities 1,000
Accounts receivable 25,000
Inventories 45,500
Total current assets $ 72,000
Land $ 26,000
Buildings and equipment 90,000
Less: Accumulated depreciation 38,000
Net fixed assets $ 78,000
Total assets $150,000
Liabilities and Stockholders’ Equity
Accounts payable $ 22,000
Notes payable 47,000
Total current liabilities $ 69,000
Long-term debt 22,950
Common stocka 31,500
Retained earnings 26,550
Total liabilities and stockholders’ equity $ 150,000
aThe firm’s 3,000 outstanding shares of common stock closed
2015 at a price of $25 per share.
a. Use the preceding financial statements to complete the following table. Assume that the industry averages given in the table are applicable for both 2014 and 2015.
Ratio Industry average Actual 2014 Actual 2015
RATIO Industry average Actual 2014 Acutal 2015
Current ratio 1.80 1.84 ___________
Quick ratio 0.70 0.78 ___________
Inventory turnovera 2.50 2.59 ____________
Average collection perioda 37.5 days 36.5 days ____________
Debt ratio 65% 67% _____________
Times interest earned ratio 3.8 4.0 _____________
Gross profit margin 38% 40% _____________
Net profit margin 3.5% 3.6% _____________
Return on total assets 4.0% 4.0% _____________
Return on common equity 9.5% 8.0% ______________
Market/book ratio 1.1 1.2 _______________
b. Analyze Zach Industries’ financial condition as it is related to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market. Summarize the company’s overall financial condition.
Explanation / Answer
Part - A the actuals for 2015 is as shown below (in table)
Part -B Analysis
Liquidity position worsened in 2015 since current and quick ratios are lower than that in 2014
With respect to activity ratios, the inventory turnover reduced showing excess inventory as also the accounts receivable period increased meaning they take more days to collect receivables. Both these are poor.
With respect to debt ratio, the debt ratio reduced which means the company reduced debt or increased assets which is a positive
The profitability improved in 2015 with better margins and return on assets
The market to book ratio improved meaning the investors gave more value to the stock
Overall profitability and debt improved with liquidity and activity ratios reducing.
Ratio Actual 2015 Current Ratio Current Assets/Current liabilties 1.043 Quick Ratio (Current Assets - Inventory)/Current liabilties 0.384 Inventory Turnover Cost of goods Sold / Inventory 2.330 Average Collection Period (days) 365* Accts Receivable/ Net credit sales 57.031 Debt ratio (Current liabilties + Long term debt)/ Total Assets 61.30% Times Interest Earned EBIT/Interest expense 2.787 Gorss Profit margin Gross Profits/Revenue 33.75% Net Prfoit margin Net Profit/Revenue 4.09% Return on assets Net Profit/Total assets 4.36% Return on common equity Net Profit/Common Equity 20.76% Market to Book Ratio Market Value/Book value 2.381Related Questions
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