Balance Sheet 2003 2011 2012 2013 Cash 34000 51000 23800 17000 Accounts Receivab

ID: 2789226 • Letter: B

Question

Balance Sheet 2003 2011 2012 2013

Cash 34000 51000 23800 17000
Accounts Receivable 136000 204000 231200 323000
Inventory 170000 255000 425000 688500
Total Current Assets 340000 510000 680000 1028500

Land and Building 51000 40800 108800 102000
Machinery 68000 125800 98600 85000
Other Fixed Assets 40800 23800 6800 5100
Total Fixed Assets 159800 190400 214200 192100
Total Assets 499800 700400 894200 1220600

Notes Payable, bank --- --- 85000 238000
Accounts and Notes Payable 74800 81600 129200 255000
Accruals 34000 40800 47600 64600
Total Current Liabilities 108800 122400 261800 557600
Mortgage - Long-term liab. 51000 37400 34000 30600
Total Liabilities 159800 159800 295800 588200

Common Stock 306000 306000 306000 306000
Retained Earnings 34000 234600 292400 326400
Total S.Equity 340000 540600 598400 632400
Total Liabilities & Equity 499800 700400 894200 1220600

Income Statement 2011 2012 2013

Net Sales 2210000 2295000 2380000
Cost of Goods Sold 1768000 1836000 1904000
Gross Operating Profit 442000 459000 476000

General, Administrative, Selling 170000 187000 204000
Depreciation 68000 85000 102000
Miscellaneous 34000 71400 102000
EBT 170000 115600 68000
Taxes (50%) 85000 57800 34000
Net Income $85,000 $57,800 $34,000

Industry
Quick Ratio 1
Current Ratio 2.7
Inventory Turnover - times 7
Inventory Period - days 52.1
Average Collection Period - days 32
Fixed Asset Turnover - times 13
Total Asset Turnover - times 2.6
Return on Total Assets 9.0%
Return on Equity 18.0%
Debt (Total) Ratio 50.0%
Profit Margin on Sales 3.5%
Internal growth rate
Sustainable growth rate

Calculate the key financial ratios for Seal-best, Inc., and plot trends in the firm's ratios against the industry averages.
2) What strengths and weaknesses are revealed by the ratio analysis?
3) What amount of internally-generated funds would be available for the retirement of the loan? If the bank were to grant the additional credit and extend the increased loan from a due date of February 1, 2014 to June 30, 2014, would the company be able to retire the loan on June 30? (Hint: To answer this question, consider profits and depreciation as well as the amount of inventories and receivables that would be carried if Seal-best's inventory turnover and average collection period (Days Sales Outstanding) were at industry average levels, that is, generating funds by reducing inventories and receivables to industry averages.)
4) In 2013, Seal-best's return on equity was 5.38 percent, versus 18 percent for the industry. Use the duPont equation to pinpoint the factors causing Seal-best to fall so far below the industry average.
5) On the basis of your financial analysis, do you believe that the bank should grant the additional loan and extend the entire line of credit to June 30, 2014?
6) If the credit extension is not made, what alternatives are open to Seal-best?
7) Under what circumstances is the validity of comparative ratio analysis questionable?

Explanation / Answer

Answer:

Q1 - Ratios

Ratios

2011

2012

2013

Quick Ratio

2.08

0.97

0.61

Current Ratio

4.17

2.60

1.84

Inventory Turn Over

6.93

4.32

2.77

Inventory Period - days

52.6

84.5

132.0

Average Collection Period - days

33.69

36.77

49.54

Fixed Asset Turnover - times

11.61

10.71

12.39

Total Asset Turnover - times

3.16

2.57

1.95

Return on Total Assets

12%

Return on Equity

15.72%

9.66%

5.38%

Debt (Total) Ratio

30%

49%

93%

Profit Margin on Sales

3.85%

2.52%

1.43%

Equity Multiplier

1.47

1.30

1.49

Q2 – Strength and Weakness of Ratio:

Ratios clearly reveal the operating performance of the company YOY and its trend. Ratios can be more useful if and only if there is benchmark ratio for comparison like a industry or a peer company to compare the performance.

Weakness if that it doesn’t clearly specify about a company’s policy on credit or the accounting methodology used in preparation of balance sheet. It requires further detail and other factors about the company and sector incl. the technology used to come to a conclusion using ratios

Q3 – Amount available for retiring loan.

If the company operates at industry average as per current ratio of 2.7 and manage the account receivable days wrt to industry average, the total amount that shall be available to retire the loan (Net Income + Depreciation + Change in Account receivables) shall be $ 250,342 against a requirement of % $ 255,000 whcich is almost close.

Hence the company shall be able to retire loan.

Q4 – Dupont Eqution

ROE =[ Net income / Sales] X [Sales / Total Assets] X [Total Assets / Avg Shareholder Equity]

ROE for 2014 = 5.68%

Q5. Banks should not grant additional grant considering the operating parameters of the company. Especially the credit policy. Since the data about industry growth is not provided the answer cannot be explained in totality.

Q6. If credit is not available, the company can make sales at a lesser margin and clear out inventory. The sale needs to be coupled with cash and carry policy to generate cash.

Company can look at monetizing other assets if they are non core.

Can also look at option for long term leases of building or sale of non core fixed assets if required.

Q7. The analysis is questionable under following reasons.

A. if the company’s accounting policies are different from that of the industry.

B. Market segment is not comparable.

C. Product quality is not comparable.

D. If there is a real policy change in revenue realization and inventory accounting methodology.

E. Also if the operating environment is different from that of peers.