Question

Based on the liquidity ratios, how would you describe Burlington Company's short-term cash situation?

What has happened to the Burlington Company efficiency ratios between 2009 and 2010? What does that tell you about the company's inventory levels? About the company's efficient use of assets?

Have the company's profitability ratios improved? What may have caused this?

Income Statement						Balance Sheets
for Years Ending December 31			Common Size			as of December 31						Liquidity Ratios	2010	2009
			Fin Stmts						Common Size			Current Ratio	4%	3%
	2010	2009	2010	2009			2010	2009	Fin Stmts			Quick Ratio	2%	2%
Sales	$   900,000	$   800,000	100%	100%		Assets			2010	2009		Working Capital	$            122,000	$           102,000
Cost of Sales	610,000	480,000	68%	60%		Cash	$     40,000	$     39,000	8%	9%		Avg. Collection Period	28%	20%	$ 2,466.00	$ 2,192.00
Gross Margin	290,000	320,000	32%	40%		Accounts Receivable	54,000	59,000	11%	13%
Selling & Admin expenses	248,000	280,000	28%	35%		Inventory	70,000	43,000	14%	10%		Asset Efficiency Ratio
Income before taxes	42,000	40,000	5%	5%		Prepaid Expenses	4,000	4,000	1%	1%		Inventory Turnover	9%	11%
Income tax expense	17,000	18,000	2%	2%		Fixed Assets (net)	340,000	310,000	67%	68%
Net Income	$     25,000	$     22,000	3%	3%		Total Assets	$   508,000	$   455,000	100%	100%
												Solvency Ratio
						Liabilities & Equities						Debt to Equity	0.40%	0.50%
						Accounts Payable	$     40,000	$     38,000	27%	27%
	12.50%					Salaries Payable	2,000	3,000	1%	2%		Profitability
						Taxes Payable	4,000	2,000	3%	1%		Return on Investment	14%	14%
						Long Term Debt	100,000	100,000	69%	70%
						Total Liabilities	146,000	143,000	29%	31%
						Contributed Capital	200,000	175,000	39%	39%		Use the following amounts to calculate the
						Retained Earnings	162,000	137,000	32%	30%		2009 asset efficiency ratios:
						Total Liabilities & Equities	$   508,000	$   455,000	100%	100%		2008 inventory	$               40,000
												Use the following amounts to calculate the
												rate of return for investment:
												2008 Contributed Capital	$200,000

Answer 1

(a). For short term cash we look at the quick ratio as it exculdes the inventory from current assets and is better to look at for short term cash: we get a quick ratio = 2.04 which is quite high and current ratio = 3.65 for 2010. So these are quie healthy ratios and morover the quick ratio is quite healthy and we can say for Burlington the short term cash condition is very good and firm is quite liquid as well.

(b). Efficiency ratios: We assume given sales as net sales. No any change is observed for Asset efficiency ratio which shows management is as effective as 2009 in 2010. Sales have gone up and accordingly assets have grown. Also Avg collection period is quite healthy.

Ratios	2010	2009
Avg Collection period	22.91 days	Data for 2008 needed
Asset efficiency ratio	1.77	1.76
inventory turnover	10.796	Data for 2008 needed

Company has been utilizing its Assets well enough. 1.77 is a good Asset turnover ratio. But company has not improved that ratio much relative to previous year. Also the inventory levels in terms of absolute numbers have gone up despite of increasing COGS. Inventory turnover ratio is low, it should be high for clearance of inventory to be high. So I would say level of inventory has gone up.

(c). For profitability lets consider following 2 ratios.

Ratio	2010	2009
Return on Equity	6.9%	7.05%
net profit margin	2.77%	2.75%

Profitability ratios are not good for the firm. ROE needs to be increased by about 2-3% from current levels and net profit margin is also not good. Moreover ROE has gone down over 2 years and NPM has improved negligibly. Although the net income has increased but at the same time total equity has increased too, as capital has been raised, and at the same time firm has retained a lot, thus ROE has decreased.

Also the admin expenses have been reduced along with increase in net sales but net income has not increased much. Hence the effects have been nullified by the taxes as well keeping the net profit margin the same.