Please find attached a multi-year Income Statement (Appendix A1) and multi-year
ID: 2657699 • Letter: P
Question
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?
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
Current Ratio: it is a measure of the company's ability to meet its current financial obligations i.e current liabilities through using current assets, generally a current ratio of greater than 1 is desirable because it represents that the total currents assets that can involve cash, marketable securities, account receivables, inventory etc. are more than the current liabilities. Now we analyse the current ratio for this company
The current ratio for this company is greater than 1 which is a good sign meaning more current assets than current liabilities in place. Also on average the current ratio is greater than industry average which is again a good sign, although in the last financial year the current ratio fell due to steep increase in account payables
Debt ratio: it is a measure of your capital structure, how leveraged a firm is i.e what is the proportion of debt in total capital
From above analysis we see that this is a quite heavily leveraged firm with on average almost 72% of its assets financed throgh debt compared to only 54% industry average, more leverage means more financial risk or chances for company to default on its financial obligations
Return on Assets
It is a measure of how well the company has been able to use its assets to generate net income for its share holders, more the ROA the better
From above average we analyse that the company is not a very good investment opportunity considering its high risk and low return on assets of on average 9% compared to that of industry at 17.46% which is significantly less, Specially aiding to low return is its reduced net income in the last financial year
Note: Average total assets: (Total assets year n-1 + total assets year n)/2 Similarly done in average shareholders equity also
Return on Equity
it is a measure of returns generated for its equity holders in form of net income, the higher the ROE the better
Since we have already seen the given company is a highly leveraged company with its capital structure containning more debt and less equity capital therefore naturally beacuse of less share holders equity its Return on equity is more at 46% compared to 38.25% industry average, Also this ROE has been on a decreasing curve due to increasing equity capital in recent years which is again an area of concern
Year 2011 2012 2013 2014 Average Industry Average Total Current Assets (a) 193.36 203.24 183.41 204.31 Total Current Liabilities (b) 130.92 124.28 137.6 196.06 Current Ratio (a/b) 1.48 1.64 1.33 1.04 1.37 1.25