Question

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets	2012
Cash and securities	$  1,554.0
Accounts receivable	9,660.0
Inventories	13,440.0
Total current assets	$24,654.0
Net plant and equipment	17,346.0
Total assets	$42,000.0
Liabilities and Equity
Accounts payable	$  7,980.0
Notes payable	5,880.0
Accruals	4,620.0
Total current liabilities	$18,480.0
Long-term bonds	10,920.0
Total debt	$29,400.0
Common stock	3,360.0
Retained earnings	9,240.0
Total common equity	$12,600.0
Total liabilities and equity	$42,000.0
Income Statement (Millions of $)	2012
Net sales	$58,800.0
Operating costs except depr'n	$54,978.0
Depreciation	$  1,029.0
Earnings bef int and taxes (EBIT)	$  2,793.0
Less interest	1,050.0
Earnings before taxes (EBT)	$  1,743.0
Taxes	$     610.1
Net income	$  1,133.0
Other data:
Shares outstanding (millions)	175.00
Common dividends	$   509.83
Int rate on notes payable & L-T bonds	6.25%
Federal plus state income tax rate	35%
Year-end stock price	$77.69

Current Ratio = 1.33

Quick Ratio = 0.61

Days sales outstanding (DSO) = 59.14 days

Asset Turnover - 1.40

Inventory Turnover Ratio = 4.09

Return on Asset(ROA)= 2.70%

Return on Equity(ROE)= 9%

Net Profit Margin= 1.93%

Question: A). Using the following data, analyse the company's performance based on the ratio, explain what each ratio figure means in terms of the performance. (50-100 word on each ratio)

B). analyze the company overall performance (summary of A)

Answer 1

Analysis of the company pettijohn inc performance based on following ratios given

1) A current ratio is one of liquidity ratio it is calculated as follows current ratio =current assets/ current liabilities where current assets includes inventories,debtors and bills receivables , cash and bank balance,accruals,short term loans,short term securities/marketable investments and current liabilities includes sundry creditors+outstanding expenses+short term loans & advances {credit balance]+ bank overdraft+cash credit+provision for taxation+proposed dividend+unclaimed dividend. current ratio indicates the ability of the company to repay short term liabilities promptly ideal current ratio is 2:1 and very high current ratio indicates existence of idle current assets.

2)Quick ratio is also one of the liquidity ratio.quick ratio indicates the ability to meet immediate liabilities and an ideal quick ratio is 1:1 quick ratio is also called as acid test ratio or liquid ratio it is calculated as follows quick ratio = quick assets/ quick liabilities where quick assets= current assets -inventories -prepaid expenses. and quick liabilities = current liabilties - bank overdraft-cash credit.

3)Days sales outstanding[DSO] this ratio indicated the effectiveness of the company's credit and collection efforts in allowing credit to the customers and the firms ability to collect money against credit sales from customers.DSO is =[accounts receivable / total credit sales in a period]*no of days in a accounting period. it shows the average no of days the receivables remain outstanding before they are collected.

4)Asset turnover ratio is a ratio based on activity or performance or turnover ratio.it is calculated as follows asset turnover ratio =turnover / net assets where turnover =sales net of sales returns and net fixed assets =[opening balance +closing balance]/2 .Asset turnover ratio shows ability to generate sales per rupee of fixed assets.

5)Inventoy turnover ratio is one of the activity/performance based ratio an inventory turnover ratio indicates how fast is used or sold. high inventory turnover ratio shows fast moving finished goods and a low ratio means dead or excessive stock of finished goods.it is given by COGS[cost of goods sold]/ average stock of finished goods where COGS in case of manufacturers opening stock of finished goods +cost of production-closing stock of finished goods. for traders it is cost of goods purchased instead of cost of production and average stock of finished goods = [opening finished goods stock+ closing finished goods]/2.

6)Return on assets [ROA] it shows net income per rupee of average total assets or tangible fixed assets. pre tax ROA= earnings before tax/ average total assets and post tax ROA =EAT/average total assets and generally pre tax ROA is preffered for analysis purpose.

7)Return on equity [ROE] also called as return on net worth.this ratio indicates profitability of equity funds/owner funds invested in the business ROE is given by pre tax ROE = EBT/Equity and a post tax ROE = EAT/Equity generally post tax ROe is used for analysis purposes and equity = equity/shareholders funds/owner funds/net worth/propprietors funds/own funds.

8)Net profit margin ratio this is one of the profitability ratio based on sales and it indicates the overall profitability of the firm.net profit margin ratio is calculated as follows =net profit/sales now the net profit may be EBT or EAT depending upon data provided and sales = sales net of sales returns. the higher the net profit margin ratio the better it is for the firm.

summary of the above ratios

1.current ratio =1.33 times > 1 .it is a goog for the company it means that current assets are greater than current liabilities in this case[$24654>$18480] just enough for the comapny to pay for short term obiligations.

2.Quick ratio=0.61 <1 means that the company is not having liquid cash to pay for its current liabilities.

3.DSO=59.14 days the lower the ratio the better it is for the firm as it shows the time lag taken by the company to collect receivables.

4.Asset turnover ratio=1.40 times the higher the ratio is favourable for the comapny as it indicates efficient use of assets by the company.

5.Inventory turnover ratio=4.09 higher ratio is better fir the company as it shows the fast movement of stock.

6.ROA=2.70 times if it is a positive number means there is upward trend in profits of the company,it shows the percentage of profit the company earns on its overall assets employed in the business.

7ROE=9% higher the ratio the better it is for the company it indicates income earned per dollar of equity funds employed.

8.net profit margin ratio = 1.93% means that every one dollar sale contributes 1.93% towards the net profit of the business,it is a key indicator of the profitability  of the company usually high net profit margin ratio is favourable.