Question

Pinnacle Plus declared and paid a cash dividend of $8,400 in the current year. Its comparative financial statements, prepared at December 31, reported the following summarized information:

	Current Year				Previous Year
Income Statement
Sales Revenue	$	200,000			$	171,000
Cost of Goods Sold		88,000				84,000
Gross Profit		112,000				87,000
Operating Expenses		54,000				47,400
Interest Expense		5,800				5,800
Income before Income Tax Expense		52,200				33,800
Income Tax Expense (30%)		15,660				10,140
Net Income	$	36,540			$	23,660
Balance Sheet
Cash	$	92,990			$	20,000
Accounts Receivable, Net		35,000				30,000
Inventory		43,000				56,000
Property and Equipment, Net		113,000				123,000
Total Assets	$	283,990			$	229,000
Accounts Payable	$	60,000			$	33,200
Income Tax Payable		1,450				1,400
Note Payable (long-term)		58,000				58,000
Total Liabilities		119,450				92,600
Common Stock (par $10)		100,800				100,800
Retained Earnings		63,740				35,600
Total Liabilities and Stockholders’ Equity	$	283,990			$	229,000

Required:

1. Compute the gross profit percentage in the current and previous years. Are the current year results better, or worse, than those for the previous year?
2. Compute the net profit margin for the current and previous years. Are the current year results better, or worse, than those for the previous year?
3. Compute the earnings per share for the current and previous years. Are the current year results better, or worse, than those for the previous year?
4. Stockholders’ equity totaled $118,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
5. Net property and equipment totaled $128,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
6. Compute the debt-to-assets ratios for the current and previous years. Is debt providing financing for a larger or smaller proportion of the company’s asset growth?
7. Compute the times interest earned ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
8. After Pinnacle Plus released its current year’s financial statements, the company’s stock was trading at $36. After the release of its previous year’s financial statements, the company’s stock price was $33 per share. Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Pinnacle’s future success?

Answer 1

			Current Year		Previous Year
1	GP Margin	GP / Sales revenue	112,000 / 200,000	56.00%	87,000 / 171,000	50.88%	Results were BETTER
2	NP Margin	Net Income / sales revenue	36,540 / 200,000	18.27%	23,660 / 171,000	13.84%	Results were BETTER
3	EPS	Net Income / Number of shares	36,540 / 10,080	3.63	23,660 / 10,080	2.35	Results were BETTER
4	ROE	Net Income / Average equity	36,540 / (164,540 + 136,400)/2	24.28%	23,660 / (136,400 + 118,000)/2	18.60%	Results were BETTER
5	Fixed asset turnover	Sales revenue / Average fixed assets	200,000 / (113,000 + 123,000)/2	1.69	171,000 / (128,000 + 123,000)/2	1.36	Results were BETTER
6	Debt to asset ratio	Total Liabilities / Total assets	119,450 / 283,990	0.42	92,600 / 229,000	0.40	LARGER
7	Times interest earned	Income before interest and tax / Interest	(52,200 + 5,800) / 5,800	10.00	(33,800 + 5,800) / 5,800	6.83	BETTER
8	PE ratio	MPS / EPS	36 / 3.63	9.93	33 / 2.35	14.04	LESS OPTIMISTIC