Part A (25 marks) Please find attached a multi-year Income Statement (Appendix A
ID: 2437017 • Letter: P
Question
Part A (25 marks)
Please find attached a multi-year Income Statement (Appendix A1) and multi-year Balance Sheet (Appendix A2) for Canadian Motorbikes. This company is a (fictional) motorcycle manufacturer that brought on a new CEO in 2012. You work for an investment company that is considering investing in the motorcycle company – and, if the investment is made, whether or not to retain the CEO. You are part of a team that is evaluating the performance of the company. Your job is to calculate and interpret important financial ratios and to make comments to help make a decision on whether or not to invest. Appendix A3 contains financial ratio averages for all companies in the industry. This should be useful.
Please use the information in Appendix A1 to A3 to do the following:
Calculate the Current Ratio, Debt Ratio, Return on Assets (ROA) and Return on Equity (ROE). For the ROA and ROE, you should use the average total assets and the average total equity in your calculations. (The average is the total across two years divided by two). Calculate these values for each of 2011-2014. Interpret your calculations: what does this information mean? How is the company doing? (16 marks)
Calculate ratios related to how quickly the company pays its trade debt and how quickly it collects from its customers. These are known as Accounts Payable (AP) Turnover and Accounts Receivable (AR) Turnover. The formula for AP Turnover is: Cost of Goods Sold/average accounts payable. The formula for AR Turnover is: credit sales/average accounts receivable. Calculate the AP and AR Turnover for each of 2011-2014. Interpret your calculations: what does this information mean? How is the company doing? (9 marks)
Appendix A1: Canadian Motorbikes Comparative Income Statement ($M) Appendix A2: Canadian Motorbikes Comparative Balance Sheet (SM) For the Years Ended Dec 31, 2009 to 2014 For the Years Ended Dec 31, 2009 to 2014 2009 2010 2011 2012 2013 2014 2009 2010 2011 287.14$299.45 $725.45 $793.34 $81455 $856.00 2012 2013 2014 $ 10.76 $ 20.56$ 25.78 $ 38.55 $ 34.21 S 29.75 $ 85.39 95.32 99.23 Sales Cost of Goods Sold$209.69 $210.45 $506.91 $559.53 $595.34 $629.43 Gross Profit Selling and Administration $ 57.34 $ 60.06 $104.14 $125.53 $136.57 $160.23 Depreciation Operating Profit Interest Earnings Before Taxes 3.17 S 2.87 57.35 62.72 S 43.46 26.79 Taxes Net Income A/R Inventory 45.01 48.54 $84.89 17.12 79.66 82.69$79.30 53.88 $ 75.33 Total Current Assets 72.89 $148.76 $193.36 $203.24 $183.41 $204.31 Land, Plant and Equipment $ 54.32 $162.28 $184.18 $178.01 $ 182.74 $ 211.48 9.49 11.65 129.68 $316.43 S385.92 $390.07 $375.64 $427.44 77.45 $ 89.00 $218.54 $233.81 $219.21 $226.57 $ 7.53$ 13.54 $21.54 $ 20.89 $ 21.22 $ 26.54 $12.58$ 15.40 $ 92.86 87.39 S 61.42 39.80 $9.41$ 12.53 35.51 24.67 $ 17.96 $ 13.01 Other Assets Total Assets 2.47 5.39 8.38 8.82 $ 1.01 S 0.92 $ 18.35 53.77 $90.73 $112.15 $109.96 $129.04 $189.84 2.16 $ 1.95 $ 39.00 $ 42.65 S 29.55 $ 18.22 Current Portion of LT Debt $ 2.88 $ 18.09 $ 18.77$ 14.32 $ 8.56 6.22 Total Current Liabilities $ 56.65 $108.82 $130.92 $124.28 $137.60 $196.06 $52.82 $185.45 $193.84 $ 161.98 104.68 79.80 109.47 $294.27 $324.76 $286.26 $242.28 $275.86 S20.21 22.16 61.16 $103.81 $ 133.36 $151.58 Total Liabilities and Equities $129.68 $316.43 $385.92 S390.07 S$375.64 $427.44 20.07 s 13.91 $ 8.57 A/P tax rate 1 -tax rate Net Income+(1-tax rate) 8.57 10.46 32% 68% 32% 68% Long-term Debt Total Liabilities 32% 68% 32% 68% 63.15 3296 68% 68% 59.43 41.76 27.07 Shareholders' Equity Appendix A3:Canadian Motorbikes Industry Averages Current Ratio Cash Ratio Inventory Turnover (days) AR Turnover (days) 1.25 0.27 44.12 32.45 60.23 16.35 3.72 2.05 0.54 9.33 32.00% 14.00% 8.50% 17 .46% 38.25% A/P Turnover (days) Cash Conversion Cycle Fixed Assets Turnover Total Assets Turnover Debt Ratio Times Interest Earned Gross Profit Margin ating Profit in Net Profit Return on Assets Return on EExplanation / Answer
All amount are calculated as Dollars($)
Current Ratio : Current Assets / Current liabilities
2011- $193.36/$130.92 = 1.48:1
2012 - 203.24/124.28 = 1.64:1
2013- 183.41/137.60 = 1.33:1
2014- 204.31/196.06 = 1.04:1
Current ratio indicates that canadian motorbikes has 1.64 times current assets for each $1 current liabilities in 2012 which is highest among four years.This is positive and indicates that they can pay the liabilities with current assets when they fall due but coming to year 2014 there ratio has decreased to 1.04:1 which is not a good sign for the company.
Debt Ratio:- Total Liabilities/Total Assets
2011- 324.76/385.92 = 0.84
2012- 286.26/390.07 = 0.73
2013 - 242.28/375.64 = 0.64
2014- 275.86/427.44 = 0.64
Debt ratio of canadian motorbikes in 2011 is 0.84 which indicates company is at high risk level. If a company has high debt ratio above 0.5 then it is considered to be highly leveraged.In 2014 its debt ratio is 0.64 which means most of its assets are financed through debt not equity.
Return on Asset(ROA) :- Net Income/Average Total Asset
Avg. Total Asset = (Beggining Period Asset + Ending Period Asset)/2
= (385.92+427.44)/2
=$ 406.68
Return On Asset(ROA) :
2011- $39/$406.68 = 9.59
2012 - $42.65/$406.68 = 10.49
2013- $29.55/$406.68 = 7.27
2014- $18.22/$406.68 = 4.48
Return on Assets is an indicator of how profitable a company is relative to its total assets.In 2012 ROA of canadian motorbikes was highest but in 2014 it reduce considerably to 4.48%.
Return On Equity:Net Income/Avg.Total Equity
Avg total equity = (Begging Period Equity+Ending Period Equity)/2
=($61.16+$151.58)/2
=$106.37
Return On Equity(ROE):
2011-39/106.37 =0.36
2012- 42.65/106.37 = 0.40
2013- 29.55/106.37 = 0.27
2014 - 18.22/106.37 = 0.17
ROE of Canadian Motorbikes in 2011 is 0.36 which means that the company generated $0.36 of Profits for every $1 of shareholder Equity.
B)Account Payable Turnover-=Credit Purchases/Avg Account Payables
Avg Account Payables -(112.15+189.84)/2=150.99
2011- 506.91/150.99 =3.35
2012 - 559.53/150.99 =3.70
2013- 595.34/150.99 =3.94
2014=629.43/150.99=4.16
Account Recievable Turnover: - Credit Sales/Avg Account Recievable
Avg Account Recievables= (84.89+99.23)/2
= 92.06
2011- 725.45/92.06 = 7.88
2012- 793.34/92.06 = 8.61
2013- 814.55/92.06 = 8.84
2014- 856.00/92.06 = 9.29
Accounts Payable Turnover measures the speed with which a company pays its suppliers.It means that canadian motorbikes in 2011 company ratio is 3.35 which increase to 4.16 in 2014 which indicates speed in paying its supplier.
In 2011 Canadian Motorbikes Account recievables turnover ratio is 7.88 which increase to 9.29 in 2014 which may implied that companies collection of acounts recievables has increased, company has a high quality customers that payoff their debts quickly.