Please find attached a multi-year Income Statement (Appendix A1) and multi-year
ID: 2555376 • Letter: P
Question
Please find attached a multi-year Income Statement (Appendix A1) and multi-year Balance Sheet (Appendix A2) for Good Dog Pet Food. This company is a (fictional) pet food retailer that brought on a new CEO in Jan 1, 2015. You have been asked to assess whether or not Good Dog is doing well under the new CEO. Your job is to calculate and interpret important financial ratios and to make comments on how things have changed since the new CEO came on board and how the company compares to peers in the industry. Appendix A3 contains industry average information – which you should find useful.
Please use the information in Appendix A1 to A3 to calculate the following ratios:
Current ratio
Account Receivable ratio (or days receivable)
Accounts Payable ratio (or days payable)
Debt ratio
Gross Profit margin
Operating Profit margin
Net Profit margin
Return on Assets
Return on Equity
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 2014, 2015 and 2016. Interpret your calculations: what does this information mean? How is the company doing under the new CEO? (You should compare things before and after the CEO came on board). How is the company doing relative to the industry?
Appendix A1: Good Dog Pet Food Comparative Income Statement ($M) For the Years Ended Dec 31, 2013 to 2016 2013 2014 2015 2016 S 57.43$ 59.89 $15.09 $158.67 $ 41.94$ 42.09 $101.38 $111.91 $ 15.49 17.80 S 43.71 $ 46.76 Sales Cost of Goods Sold Gross Profit Seling and Administration $ 11.47 $ 12.01 $ 20.83 $ 25.11 Depreciation Operating Profit Interest Eamings Before Taxes$ 0.63 $ 0.57 11.47 $ 12.54 Taxes Het LCOATLE $ 1.51$ 2.714.31 $ 4.18 $ 2.52$ 3.08 $ 18.57 $ 17.48 $ 1.88$ 2.51 7.10$ 4.93 $ 0.20$0.18 $ 3.67 $ 4.01 $ 0.43$ 0.39 $ 78O $ 8.53Explanation / Answer
Accounts Receivable Turnover Ratio = Net Average Credit Sales /Average Gross Account Receivable
Average Gross Account Receivable = (Binging Account Receivable +Ending Account Receivable)/2
Table Showing Computation Average Account Receivable
Year
Beginning Receivable ($)
Ending Receivable($)
Average Gross Account Receivable ($)
2014
9
9.71
16.71
2015
9.71
16.98
13.25
2016
16.98
17.80
17.39
Account Receivable Turnover Ratio,.
Year
Credit sales ($)
Average Account Receivable ($)
Account Receivable Turnover ratio in Times
2014
59.89
16.71
3.58
2015
145.09
13.25
10.95
2016
158.67
17.39
9.12
Days Receivable
Year
Account Receivable Turnover Ratio
Average Days=365/A/R ratio
2014
3.58
102 Days
2015
10.95
33Days
2016
9.12
40 Days
Inter Predation
Account revisable turnover ratio is the number of days within which Account receivable will be converted into cash compared with the 2014 year(102 Days) CEO made good turnover collection in 2015 (33 days) which was slightly reduced in 2016 940 Days).comparing with the industrial ratio (34.5Days) CEO perform bit poor.
The accounts Payable Turnover ratio
Accounts Payable Turnover Ratio = Net Credit Purchase /Average Gross Account Payable
Average Gross Account Payable = (Binging Account Payable +Ending Accounts Payable)/2
Table Showing Computation Average Account Payable
Year
Beginning Payable($)
Ending Payable($0
Average Gross Account Payable($)
2014
10.75
18.15
14.45
2015
18.15
22.43
20.29
2016
22.43
21.99
22.21
Computation of Credit purchase
Purchase = Cost of Goods sold +Closing Inventory – Opening Inventory.
Year
Cost of Goods Sold ($)
Closing Inventory($)
Opening inventory ($)
Purchases ($)
2014
42.09
15.93
3.42
54.6
2015
101.38
16.54
15.93
101.99
2016
111.91
15.86
16.54
111.23
Account Payable Turnover Ratio,.
Year
Credit Purchase ($)
Average Account Payable ($)
Account payable Turnover ratio in Times
2014
54.6
14.45
3.77
2015
101.99
20.29
5.02
2016
111.23
22.21
5
Days Payable
Year
Account Payable Turnover Ratio
Average Days=365/A/R ratio
2014
3.77
97
2015
5.02
72 Days
2016
5
73 Days
Interpretation
A/ P Ratio is the days within which company should pay its creditors. In the period of new CEO, it shows a negative trend. But comparing to Industrial Average it shows a positive trend.
Debt Ratio.
Debt Ratio = Total Liability /Total Asset
Year
Total Debt ($)
Total Asset ($)
Debt Ratio
2013
21.89
25.94
.84
2014
58.85
63.29
.93
2015
64.95
77.18
.84
2016
57.25
78.01
.73
Interpretation.
Debt ratio Means how many assets of the company is financed by Debt. It is better to manage the debt ratio to the lowest. After the appointment of New CEO, it is showing a decreasing trend that’s positive for the company But Comparing to the Industrial Average it shows a negative trend.
Gross Profit Margin Ratio.
Gross profit Ratio = (Gross profit /Net Sales)*100
Year
Gross Profit($)
Net Sales ($)
Gross profit Ratio
2013
15.49
57.43
27%
2014
17.80
59.89
295
2015
43.71
145.09
30%
2016
46.76
158.67
295
Interpretation.
G. P Ration means How much of the total revenue goes to gross profit G.P ration shows a consistency in all the years which is good and when comparing to industrial average its consisted. (Only1% Difference in every FY).
Operating Profit Margin Ratio.
Operating profit Ratio = (Operating profit /Net Sales0*100
Year
Operating Profit ($)
Net Sales ($)
Operating profit Ratio
2013
2.52
57.43
4%
2014
3.08
59.89
5%
2015
18.57
145.09
12%
2016
17.48
158.67
11%
Interpretation
O.P Ration means How much of the total revenue goes to Operating profit It shows an increasing trend after new CEO appointed which is highly Appreciable. But last year it reduced by 1% Comparing to last year company ratio as well as the industrial ratio.
Net Profit Margin Ratio.
Net profit Ratio = (Net profit /Net Sales0*100
Year
Net Profit ($)
Net Sales ($)
Net profit Ratio
2013
.43
57.43
.7%
2014
.39
59.89
.65%
2015
7.80
145.09
5%
2016
8.53
158.67
5.3%
Interpretation
NP Ration means How much of the total revenue goes to net profit Net profit Margin Ratio also showing an increasing trend after the appointment of new CEO But it is low compared to market ratio.
ROA
ROA = Net Income /Average Total Asset.
Average total Asset = (Asset at the begging of a Year +Asset at the end of a year)/2
Average total Asset Computation.
Year
Opening value of Asset($)
Closing Value Of asset ($)
Average ($)
2014
25.94
63.29
44.61
2015
63.29
77.18
70.23
2016
77.18
78.01
77.59
Computation of ROA
Year
Net Income ($)
Average total Asset ($)
ROA
2014
.39
44.61
.87%
2015
7.80
70.23
11%
2016
8.53
77.59
10%
Interpretation.
ROA means how much income generated using companies net asset Comparing to the period before CEO’s Appointment ROA Showed a tremendous which was reduced by 1% in the next year. ROA is too less than the industrial ratio.
ROE
Net income /Average Equity
Average equity = (Binging balance of equity in a year +ending Balance of Equity)/2
Computation of Average Equity.
Year
Opening value of Equity ($)
Closing Value Of Equity ($)
Average ($)
2014
4.04
4.43
4.23
2015
4.43
12.23
8.33
2016
12.23
20.76
16.49
ROE Computation
Year
Net Income
Average total Equity
ROE
2014
.39
4.23
9%
2015
7.80
8.33
93%
2016
8.53
16.49
51%
Interpretation
ROE means how much income generated using owners capital ROE is out of total income is available to equity holders it shows a positive in the first year of appointment of CEO But in 2016 it shows a negative trend comparing to preceding year but it shows a positive trend comparing to the industry average
Year
Beginning Receivable ($)
Ending Receivable($)
Average Gross Account Receivable ($)
2014
9
9.71
16.71
2015
9.71
16.98
13.25
2016
16.98
17.80
17.39