Question

Question No. 1 (Marks 15)

C Company’s forecasted 2020 financial statements are given below, along with industry average ratios.                                                                                    

C Company: Forecasted Balance sheet as of December 31, 2020

Cash	72,000
Accounts Receivable	439,000
Inventories	894,000
Total Current Assets	1,405,000
Land and Buildings	238,000
Machinery	132,000
Other Fixed assets	61,000
Total Assets	,1,836,000
Equity & Liabilities
Accounts and Notes Payable	432,000
Accrued liabilities	170,000
Total Current liabilities	602,000
Long term Debt	404,290
Common stock	575,000
Retained earnings	254,710
Total Equity & Liabilities	1,836,000

C Company: Forecasted Income Statement for the year ended December 31, 2020

Sales	4,290,000
Cost of goods sold	3,580,000
Gross profit	710,000
General Selling and Admin Expenses	236,320
Depreciation	159,000
Other Expenses	134,000
Profit before Tax	180,680
Taxes 40%	72,272
Profit after tax	108,408

Per Share data            

EPS                                                                                                     4.71

DPS                                                                                                     .95

Market Price Per Share                                                                       23.57

P/E Ratio                                                                                             5 times

Total No. of Shares                                                                             23,000

Industry Average Ratios - 2020

Current Ratio	2.7
Inventory Turnover	7 times
Average Collection Period	32 days
Total Asset turnover	2.6 times
Debt Ratio	50%
Profit Margin on Sales	3.5%

Quesytion : Calculate C Company’s forecasted Ratios, compare them the industry average data and comment briefly on strength and weaknesses of the company ?

Answer 1

Current Ratio = Current assets/ Current Liabilities

=1,405,000/602,000= 2.33

Inventory Turnover Ratio = Cost of goods sold / Average inventory

=3,580,000/894,000 = 4 times

Average Collection Period = 365 / Accounts turnover ratio

Accounts turnover ratio= net sales/ Average accounts receivable

4,290,000/439,000 = 10

Average Collection Period = 36.5

Total Asset turnover = Net Sales/average of aggregate assets

4,290,000/1,836,000 = 2.34

Debt ratio = Liabilities/ Assets %

1581290/ 1836000=86%

Profit Margin Sales= Profit after tax/ Sales

=108408 / 4,290,000 =2.5%

	Industry Forecasted
Current Ratio	2.7 2.33
Inventory Turnover	7 times   4 times
Average Collection Period	32 days   36.5 days
Total Asset turnover	2.6 times 2.34 times
Debt Ratio	50% 86%
Profit Margin on Sales	3.5% 2.5%

Strength and weaknesses of the company:

Strength

1. The short term liquidity of the company though is slightly below the industry average is satisfactory and the company is in a good condition to meet its short term financial obligations.
2. Asset Turnover is also satisfactory as company is able to generate profit from its assets.
3. Inventory turnover ratio also suggests satisfactory results.
4. Average collection period though a bit high is still satisfactory.

Weaknesses

1. The Debt ratio being high means the leverage is high and low financial flexibility
2. Profit margin from sales is very less.