Question
The following problems should help you prepare Consider the following information. Assume industry ratios have been constant. Calculate the firm's current and quick ratios. Compare them to the industry. How have they changed over time? Calculate the firm's ROA, ROE, and ROIC. Compare them to the industry. How have they changed over time: Calculate the firm's Margins. Compare them to the industry. How have they changed over time? Calculate the firm's Debt to Total Capital. Compare it to the industry How has it changed over time? Calculate the firm's FCF for 2017. Calculate the firm's MVA for 2016 and 2017. Calculate the firm's EVA for 2016 and 2017. Make a critical assessment of the firm. Use ALL of the information calculated above. a. b. c. d. e. f. g. h. Other Data 2017 2016 Year End Stock Price Number of Shares Cost of Capital $2.25 S8.5 00,000 100,000 10% 10.50% Ratio Current Quick (Acid) Profit Margin Operating Profit Margin ROA ROE ROIC Debt to Capital 2017 2016 Industry 2.7x 1.0x 3.50% 7.30% 9.30% 18.20% 14.50% 40.00%
Explanation / Answer
For answer a,b,c,d
Liquidity Ratios 2017 2016 Industry Average Comments
Current Ratio Total Current Assets/Total Current Liabilities =1926802/1650568 1.17
Total Current Assets/Total Current Liabilities=1124000/481600 2.33 Decrease 2.7 Weakness. Current ratio has decreased from 2016 to 2017 and is also less than the industry average of 2.7x. Though the ratio is greater than 1, it is competent to meet its short term obligation. however, one needs to be careful with why the ratio has declined suddenly.
Quick Ratio (Total current Assets-Total Inventories)/Total Current Lliabilities =(1926802-1287360)/1650568 0.39
(Total current Assets-Total Inventories)/Total Current Lliabilities =(1124000-715200)/481600 0.85 Decrease 1 Weakness. Decrease in Quick Ratio is also not good as the company does not have sufficient liquidity to meet its short term obligations. Comparing it with Current ratio, the company has huge inventory indicating that the movement of goods are slow.
Return on Assets % Net Profit/Total Assets = -160176/2866592 -5.59%
Net Profit/Total Assets=87960/1468800 5.99% Decrease 9.30% Weakness: The company's ROE is less than the average and has decreased drastically in 2017. Negative returns is because the company has reported losses and this is primarily due to high operating cost and depreciation on assets.
Return on Equity % Net Profit/Shareholder's Equity = -160176/492592 -32.52%
Net Profit/Shareholder's Equity =87960/663768 13.25% Decrease 18.20% Weakness: ROE is also negative for 2017. 2016 result was also below the industry average of 18.20%. The company shoukd try to improve their net Income considering huge shareholder;'s equity.
Return on Invested Capital Net Operating Profit After Tax/ Total Capital = 130948*(1-0.4)/(492592+723432+636808) -4.24%
Net Operating Profit After Tax/ Total Capital = 190428*(1-0.4)/(663768+323432+200000) 9.62% Decrease 14.50% Weakness: The company does not have good return on invested capital as compared to peers. 2017 results are weak and the company's ability to generate profit from its investments are poor.
Profit Margin % Net Profit/Sales =-160176/6034000 -2.65%
Net Profit/Sales =87960/3432000 2.56% Decrease 3.50% Profit margin for 2016 was lower to the industry average. The company's profit generation has decreased in the last one year, though the sales have increased drastically. One reason could be investment in fixed assets which has increased the depreciation for the company. However, the company should focus on decreasing its operating cost to improve profits
Operating Profit Margin % Net Operating Profit (EBIT)/Sales = -130948/6034000 -2.17%
Net Operating Profit (EBIT)/Sales = -130948/6034000 5.55% Decrease 7.30% Operating Margin has declined and is lower than industry average. Again this is the weakeness of the company;'s management in converting its sales in to profit. This shows operational inefficiency.
Debt to Capital Total Debt/ Toal capital =(723432+636808)/(492592+723432+636808) 73.41%
Total Debt/ Toal capital =(723432+636808)/(492592+723432+636808) 44.09% Decrease 40.00% The company's debt to capital is very high as compared to industry average of 40%. This is not good for the company as its interest expense would increase drastically. Also, with the historical performance of the company debt abd interest servicing will become difficult.
