Please ignore my solution, 32) Given the following balance sheet, income stateme
ID: 2656643 • Letter: P
Question
Please ignore my solution, 32) Given the following balance sheet, income statement, historical ratios and industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the most recent year. Analyze its overall financial situation from cross-sectional and time-series viewpoint. Break your analysis into an evaluation of the firm's liquidity, activity, debt, and profitability. Income Statement Pulp, Paper, and Paperboard, Inc. For the Year Ended December 31, 2013 Sales revenue Less: Cost of goods sold CLS $2,080, 976 Gross profits Less Operating expenses $ 379,976 -273846 $ 106,130 -Operating profits Less: Interest expense Net profits before taxes 34 52100 Less: Taxes (40%) 24 Net profits after taxes Balance Sheet Pulp, Paper, and Paperboard, Inc. December 31, 2013 Assets Aveses 95,000esstreday Cash Accounts receivable Inventories 570 I, 30 Total current assets 500,000 Gross fixed assets Less: Accumulated depreciation Net fixed assets Current liabilities s 89,000 Accounts payable Notes payable Accruals 169,000 $ 345,000 533,000 255,000 lA Total current liabilities Long-term debt Total liabilities ?2-10 Retained earrings Total stockholders' equity Total labilities and stockholderss equity 2e8s 976Explanation / Answer
Liquidity ratios
1. Current ratio = Current assets / Current liabilities = 575000 / 345000 = 1.67
Analysis: Ideally should be around 2:1, but industry is at 1.6 itself, so acceptable. The trend as well has stayed stable at >1.6.
2. Quick ratio = Cash + AR / Current Liabilities = 332000 / 345000 = 0.96
Analysis: Slightly better than industry average, and trend has stayed at 0.9 or above. Ideally should be 1 so it is good.
Activity ratios
3. Inventory turnover = Cost of goods sold / Average Inventory = 7 times
Analysis: It has fallen to 7 from 9.3 which is concerning as this could indicate less efficiency in inventory management during the year. This is also lower than the industry average of 8.4 times.
4. Average collection period = 365 / (Sales / Average AR) = 365 / (2080976 / 237000) = 41.57 days
Analysis: The company has consistently inreased average collection period which is good, indicating speedy collection of receivables and a stricter credit policy. The ratio is also better than the industry average, another good sign.
5. Total asset turnover = Sales / total assets = 2080976 / 1000000 = 2.08 times
Analysis: It has fallen from 2.3 in 2011, to 2.08 times in 2013, which is concerning as this could be an indicator of less efficiency in use of fixed assets. Note that this is also lower than the industry average of 2.2, another negative sign.
Debt ratios
6. Debt ratio = total liabilities / total assets = 533000 / 1000000 = 53%
Analysis: The ratio has fallen from 60% in 2011 to 53% in 2013, indicating that the company is increasingly relying on debt as a source of capital. Generally the ratio should be around 50% and stable, but in this case the ratio has fallen below the industry average of 58%. This can be a cause of concern.
7. Times interest earned = operating profits / interest expense = 106130 / 19296 = 5.5 times
Analysis: This ratio has increased steadily from 2.5 to 5.5, and much higher than the industry average of 2.3 times, indicating ease of making interest payments out of operating income, which is a good sign.
Profitability ratios
8. Gross profit margin = Gross profit / Sales = 379976 / 2080976 = 18.26%
Analysis: This has fallen from 21% in 2011, to 18.3% in 2013, which is a negative sign as this can be indicating lower profit margins due to prices of raw material, manufacturing costs or other direct costs. This is also lower than the industry average of 20.4%, which is another negative sign and cause for concern.
9. Operating profit margin = Operating profit / Sales = 106130 / 2080976 = 5.1%
Analysis: Has increased from 4.7% in 2011, to 5.1% in 2013, which is a good sign as it means that operating expenses as a % of sales are lower. This ratio is also better than the industry average of 4.7%, which is a good sign.
10. Net profit margin = net profit / sales = 52100 / 2080976 = 2.5%
Analysis: Net profit margins have increased from 1.8% in 2011, to 2.5% in 2013, which is a good sign indicating better profitability in the business. This is also better than the industry average of 1.4% which is a good sign.
11. Return on total assets = net profit / total assets = 52100 / 1000000 = 5.21%
Analysis: This ratio had lowered in 2012 to 3.5%, but has increased to 5.21% and higher than the industry average of 3.08%, which is a good sign showing better profitability through use of assets of the company.
12. Return on equity = net profit / stockholder's equity = 52100 / 467000 = 11.16%
Analysis: This ratio had declined in 2012, but has increased to 11.16% in 2013, indicating better return to shareholders (owners) of the firm. This is also above the industry average of 7.3%, indicating that the firm is generating higher profits per capital provided by shareholders.