Use the following information to answer the following questions. ABC, Inc. Incom
ID: 2813207 • Letter: U
Question
Use the following information to answer the following questions.
ABC, Inc. Income Statement (in thousands)
December 31, 2014
Sales $200,000
Cost of goods sold 140,000
Gross profit on sales 60,000
Operating expenses 56,000
Operating income (EBIT) 4,000
Interest expense 1,000
Earnings before tax 3,000
Income tax 1,050
Net income available to common stockholders $1,950
Number of shares outstanding 1, 500
Market price per share $22
ABC, Inc. Balance Sheet (in thousands)
December 31, 2014
Assets
Cash $2,000
Accounts receivable 17,800
Inventories 8,700
Total current assets 28,500
Gross fixed assets 70,000
Accumulated depreciation 26,500
Net fixed assets 43,500
Total assets $72,000
Liabilities and Equity
Accounts payable $18,000
Accruals 13,350
Total current liabilities 31,350
Long-term debt 8,250
Total liabilities 39,600
Common stock (par value and paid in capital) 2,000
Retained earnings 30,400
Total stockholders' equity 32,400
Total liabilities and equity $72,000
Industry Key Ratios
Industry Average Ratios
Current ratio 1.1
Quick ratio 0.60
Days Sales Outstanding (DSO) 25 days
Fixed assets turnover 5.8
Total asset turnover 2.95
Liabilities-to-assets ratio 65%
Times-interest-earned 3.2
Net profit margin 1.3%
Return on equity 7.32%
Price/earnings ratio 20.38
Market/book ratio 3.19
5. Evaluate the performance of the firm in the follwing areas:
Liquidity Management , Asset Management, Debt Management, and Profitability Management
6. Explain the deductive reasoning process applied to analyze the firm's performance.
Explanation / Answer
(5) Evaluation of the performance of the firm.We have,
(6) Analyzing the firm's performance by deductive reasoning process.We have,
Note1: Firm performance is poor because ratio of firm is smaller than industry average ratios and vice versa.
Particulars Formula Ratio Liquidity Management: Current Ratio Current Asset/ Current Liabilities 28,500/31,350 0.91 Quick Ratio (Current asset - Inventroy)/ Current Liabilites (28,500 - 8,700)/31,350 0.63 Turnover Ratio: Days sales outstanding Account receivable / Net sales x 365 17,800/ 200,000 x 365 32 Days Fixed assets turnover Net sales / Net Fixed Asset 200,000 / 43,500 4.60 Total asset turnover Net Sales / Total assets 200,000 / 72,000 2.78 Debt Management: Liabilities-to-assets ratio Total Liabilities / Total Asset 39,600 / 72,000 55 % Times-interest-earned EBIT / Interest expense 4,000 / 1,000 4.00 Profitability Management: Net profit margin Net profit / Net sales (1,950/200,000)*100 0.98 % Return on equity Net Profit for common shareholder/Shareholder equity 1,950 / 32,400 6.02 % EPS Net Profit for common shareholder/ Number of share outstanding 1,950 / 1,500 1.30 Price/earnings ratio Market value per share / EPS 22/1.3 16.92 Market/book ratio Market Share Price / Net Book Value per Share( Shareholder equity/Number of share outstanding) 22 / (32,400/1,500) 1.02