ABC Company, a toy manufacturer, believes the coming holiday season (between Tha
ID: 2553887 • Letter: A
Question
ABC Company, a toy manufacturer, believes the coming holiday season (between
Thanksgiving in late November and Christmas on the 25th of December) will be a
very good one, expecting an increase of 20% in its sales. Outside economic
analysts believe the effects of the recent recession are over. Consumer
confidence is high. To meet that 20% increase, however, inventories must be built
up so, to finance that expansion, ABC wants to borrow $1,000,000 from its bank. You are the loan officer who must make the decision as to whether or not to give
ABC the money. You are going to prepare ratios for 3 years, the Cash Conversion
Cycle for the same period and operating cash flow for the years for which you
have figures.
Review the Balance Sheets and Income Statements for ABC over the 3 years and
answer the following questions
Do you believe ABC’s cash position and its management of cash needs
Financial Analysis Project – ABC Company 2015 2016 2017 Balance Sheet Assets Cash 807,000 628,000 612,000 Accounts Receivable 2,682,000 2,896,000 4,605,000 Inventories 2,970,000 5,181,000 7,319,000 Total Current Assets 6,459,000 8,705,000 12,536,000 Net Fixed Assets 2,316,000 2,423,000 2,538,000 Total Assets 8,775,000 11,128,000 15,074,000 Liabilities and Equity Accounts Payable 1,061,000 1,648,000 3.137,000 Notes Payable 500,000 800,000 2,860,000 Accruals 540,000 800,000 1,150,000 Total Current Liabilities 2,101,000 3,248,000 7,147,000 Long Term Debt 1,450,000 1,908,000 1,867,000 Common Stock 3,650,000 3,650,000 3,650,000 Retained Earnings 1,574,000 2,322,000 2,410,000 Total Equity 5,224,000 5,972,000 6,060,000 Total Liabilities & Equity 8,775,000 11,128,000 15,074,000 Income Statement Sales 26,820,000 28,966,000 30,703,000 Cost of Sales 21,216,000 23,550,000 26,140,000 Gross Profit 5,604,000 5,416,000 4,563,000 Operating Expenses 2,574,000 3,225,000 3,866,000 Operating Profit 3,030,000 2,191,000 697,000 Interest 91,000 275,000 469,000 Earnings before Taxes 2,939,000 1,916,000 228,000 Taxes (48%) 1,411,000 919,000 110,000 Net Income 1,528,000 997,000 118,000Explanation / Answer
Ratio Ananlysis: Ratios Calculation 2015 2016 2017 3 Year Avergae Ratio Industry Average Decision Liquidity Ratios:- Current Ratio Current Assets / Current Liabilities 3.07 2.68 1.75 2.5 2.5 Favorable Quick Ratio Quick Assets / Current Liabilities 1.66 1.08 0.73 1.16 1 Favorable Asset Management Ratios:- Average Collection Period 365 / Accounts Receivable turnover ratio 36.5 36.5 54.8 42.60 32 Days Unfavorable Inventory Turnover ratio Cost Of goods sold / Inventory 7.14 4.55 3.57 5.09 7 Unfavorable Asset Turnover ratio Net Sales / Total Assets 3.056 2.6 2.036 2.56 12 Unfavorable Debt Management Ratios:- Total Debt to Total Assets 16.52% 17.15% 12.38% 15% 50% Favorable Times Interest Earned Operating Profit / Interest Payable 33.29 7.96 1.486 14.25 7.7 Favorable Profitability Ratios:- Profit Margin Net Income / Sales 5.69% 3.44% 0.38% 3% 2.90% Favorable Return on Equity Net Income / Shareholders Equity 29.25% 16.70% 1.95% 16% 17.50% Unfavorable Based on ratio analysis, the firm is in need of some cash as the asset management ratios are unfavorable as compared to the industry standards. Also, the debt management ratios are favorable, which is a positive indiator of firms ability to serve debt. Profit margin and liquidty ratios are also favorable. Cosidering the overall ratios, the bank should grant loan to ABC.