7-16. Cary Corporation’s forecasted 2016 financial statements follow, along with
ID: 2761522 • Letter: 7
Question
7-16. Cary Corporation’s forecasted 2016 financial statements follow, along with industry average ratios.
A - Calculate Cary’s 2016 forecasted ratios, compare them with the industry average data, and comment briefly on Cary’s projected strengths and weaknesses.
B - What do you think would happen to Cary’s ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts.
2016
Cary
Industry
Cash
$ 72,000
Quick
0.8
1.0
A/R
439,000
Current
2.3
2.7
Inventories
894,000
Inv. turn.
4.0
5.8
Land and bldg.
238,000
DSO
37
32
Machinery
132,000
FA turnover
10.0
13.0
Other F.A.
61,000
TA turnover
2.3
2.6
ROA
5.9%
9.1%
Accts & Notes Pay.
$ 432,000
ROE
13.1%
18.2%
Accruals
170,000
TD/TA
54.8%
50.0%
Long-term debt
404,290
PM
2.5%
3.5%
Common stock
575,000
EPS
$4.71
n.a.
Retained earnings
254,710
Stock Price
$23.57
n.a.
P/E ratio
5.0
6.0
Total assets
$ 1,836,000
M/B
0.65
n.a.
Total claims
$ 1,836,000
Ret. earnings
2015
168,152
Income statement
Sales
$ 4,290,000
Cost of G.S.
3,580,000
Adm. & sales exp.
236,320
Depreciation
159,000
Misc.
134,000
Net income
$ 108,408
P/E ratio
5.0
No. of shares
23,000
Cash dividend
$ 0.95
2016
Cary
Industry
Cash
$ 72,000
Quick
0.8
1.0
A/R
439,000
Current
2.3
2.7
Inventories
894,000
Inv. turn.
4.0
5.8
Land and bldg.
238,000
DSO
37
32
Machinery
132,000
FA turnover
10.0
13.0
Other F.A.
61,000
TA turnover
2.3
2.6
ROA
5.9%
9.1%
Accts & Notes Pay.
$ 432,000
ROE
13.1%
18.2%
Accruals
170,000
TD/TA
54.8%
50.0%
Long-term debt
404,290
PM
2.5%
3.5%
Common stock
575,000
EPS
$4.71
n.a.
Retained earnings
254,710
Stock Price
$23.57
n.a.
P/E ratio
5.0
6.0
Total assets
$ 1,836,000
M/B
0.65
n.a.
Total claims
$ 1,836,000
Ret. earnings
2015
168,152
Income statement
Sales
$ 4,290,000
Cost of G.S.
3,580,000
Adm. & sales exp.
236,320
Depreciation
159,000
Misc.
134,000
Net income
$ 108,408
P/E ratio
5.0
No. of shares
23,000
Cash dividend
$ 0.95
Explanation / Answer
Answer
Answer A
Calculate Cary’s 2016 forecasted ratios, compare them with the industry average data, and comment briefly on Cary’s projected strengths and weaknesses.
Answer: Cary Corporation’s Quick ratio and current ratio is below industry average which shows moderate liquidity squeeze in working capital compared to industry. Inventory turnover is also low compared to industry average which shows company is not efficiently in rotating inventory in relation to sales in line with industry. Day’s sales outstanding are higher for Cary compared to industry which shows moderate inefficiency in collection of sales revenue. Fixed assets turnover and Total Assets turnover is also low compared to industry average showing that Cary is not able to generate enough sales revenue in relation to assets investments in line with industry. Return on Assets and Return on Equity is also low compared to industry average showing Cary is not able to generate enough returns on assets and equity investments in line with industry. Total debt to total assets is also higher for Cary compared to industry average showing moderately high leverage. Profit margin of Cary is also less compared to industry average showing below industry average profit generation ability. P/E ratio of Cary is also low compared to industry average showing that investors are not willing to pay enough price for Cary’s share in line with industry.
Overall financial position of Cary Corporation is moderately weak compared to overall industry.
Answer B
What do you think would happen to Cary’s ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts.
Answer : If company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold which may improve Return on assets, Return on equity, Inventory turnover and profit margin ratio but lower levels of inventory may further deteriorate current ratio and quick ratio of Cary Corporation.
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