II. (32 points) Use the following financial statements for Unicorns Incorporated
ID: 2784989 • Letter: I
Question
II. (32 points) Use the following financial statements for Unicorns Incorporated Workshops (UIW) to perform a ratio analysis.
UNICORNS INCORPORATED WORKSHOPS (UIW)
Income Statement for Years Ending December 31, 2016
2016
Net sales (all credit) $70,000
Less: Cost of goods sold 15,000
Gross profits $55,000
Less: Depreciation 1,500
Other operating expenses 10,000
Earnings before interest and taxes (EBIT) $43,500
Less: Interest 2,500
Earnings before taxes (EBT) $41,000
Less: Taxes (25%) 10,250
Net income $30,750
UNICORNS INCORPORATED WORKSHOPS (UIW)
Balance Sheet as of December 31, 2016
Assets 2016 Liabilities & Equity 2016
Current assets: Current liabilities:
Cash $ 3,500 Accrued wages and taxes $ 7,000
Accounts receivable 6,300 Accounts payable 11,000
Inventory 9,300 Total Current Liabilities $18,000
Total Current Assets $19,100
Long-term debt: $31,000
Fixed assets: Total Debt $49,000
Land and Building $72,000
Other long-term assets 18,600 Owners’ equity:
Total Fixed Assets $90,600 Total Equity $60,700
Total assets $109,700 Total Liabilities and Equity $109,700
A.Please refer to the financial statements above. For the fiscal year ending in January of 2016, calculate:
Profitability
a. Return on Equity (Industry Average = 10.0%)
b. Return on Invested Capital (Industry Average = 8.0%)
Turnover-Control
c. Fixed-asset Turnover (Industry Average = 1.25 times)
d. Inventory Turnover (Industry Average = 5.00 times)
e. Collection Period (Industry Average = 90 days)
Leverage & Liquidity
f. Current Ratio (Industry Average = 2.00 times)
g. Debt to assets (Industry Average = 40.0%)
h. Times Interest Earned (Industry Average = 8.50 times)
B. Comparing their performance to the provided industry averages, what do these ratios suggest about the company’s performance?
Explanation / Answer
A. a) Return on Equity (ROE) = Net Income / Shareholders Funds
ROE = $30,750 / $60,700 = 0.5066 or 50.66%
b) Return on Invest Capital (ROIC) = Net Income / Total Capital = Net Income / (Total Equity + Long term Debt)
ROIC = $30,750 / ($60,700 + $31,000) = 0.3353 or 33.53%
c) Fixed Asset Turnover = Net sales / Fixed Asset
Fixed Asset Turnover = $70,000 / $90,600 = 0.77 times
d) Inventory turnover = Net sales / Average Inventory = $70,000 / $9300 = 7.53 times (Some people use cost of goods sold instead of net sales)
e) Collection period = (Average Receivables / Total credit Sales) * 365
Collection period = ($6,300/ $70,000) * 365 = 33 days
f) Current Ratio = Current Asset / Current Liabilities = $19,100 / $18,000 = 1.06 times
g) Debt to Asset Ratio = Total Debt / Total Assets = $49,000 / $109,700 = 0.4467 or 44.67%
h) Times Interest Earned = EBIT / Interest = $43,500 / $2500 = 17.4 times
B. Profitability: Considering the profitability ratios, the company is performing really well as its ROE is more than 5 times the industry average and the ROIC is more than 4 times industry average.
Turnover-Control: In terms of Fixed-asset turnover, which indicates how well the company is using its assets to generate sales, the company is performing below par as it is below the industry average meaning that the company is not using its assets efficiently. Inventory turnover indicates how many a company's inventory is sold and replaced over a period of time. It indicates how fast the company is selling its inventory. In our case, the ratio is above the industry average which means company is able to sell its products faster than the industry average. Collection Period indicates the amount of time it takes to recover the accounts receivable. The less the period, the better it is. In our case, the company can recover receivables in 33 days which is almost 1/3rd of the industry average of 33 days.
Leverage & Liquidity : Current Ratio indicates the company's ability to pay short term and long term obligations. In our case, this ratio is almost half of industry which leaves little breathing space in terms of difficulty in paying short term and long term obligations. Total debt to assets indicates the debt component in total assets of the company. The higher this ratio, the greater is the financial risk. In our case, it is 44.67% which is more than the industry average, indicating a high financial risk that the company could be burdened with interest and principal repayments. Times Interest Earned Ratio indicates that how many times the company's before interest income can cover the interest obligations. In our case 17.4 times which is more than double the industry average and clears the doubt raised by the previous ratio.