Question

Joseph Berio is a loan officer with the First Bank of Tennessee. Red Brick, Inc., a major producer of masonry products, has applied for a short-term loan. Red Brick supplies building material throughout the southern states, with brick plants located in Tennessee, Alabama, Georgia, and Indiana.
The firm’s income statement and balance sheet are given below. The third table presents both a ratio analysis of Red Brick’s previous year’s financial statements and the industry averages of the ratios.

Red Brick Income Statement
(for the period ending December 12/31/20X1)
Sales	$	209,000,000
Cost of goods sold		166,000,000
Administrative expenses		28,000,000
Operating income	$	15,000,000
Interest expense		9,000,000
Taxes		300,000
Net income	$	5,700,000

Red Brick Balance Sheet as of 12/31/20X2
Assets				Liabilities and Stockholders’ Equity
Cash	$	600,000		Accounts payable	$	44,000,000
Accounts receivable		33,000,000	*	Notes payable		9,000,000
Inventory		79,500,000	†	Long-term debt		48,000,000
Plant and equipment		125,000,000		Stockholders’ equity		137,100,000
	$	238,100,000			$	238,100,000
*70% of sales are on credit.
† Previous year’s inventory was $69,100,000.

	Company’s Ratios	Industry
	(Previous Year)	Average
Current ratio	2.2:1	2.3:1
Quick ratio	0.6:1	0.8:1
Inventory turnover	4.0x	4.5x
Average collection period	51 days	52 days
Debt ratio (debt/total assets)	31%	42%
Times-interest-earned	1.7	3.5
Return on equity	4.4%	14.1%
Return on assets	2.6%	10.4%
Operating profit margin	5.5%	15.2%
Net profit margin	2.1%	9.0%

To help decide whether to grant the loan, compute the following ratios and compare the results with the company's previous year ratios and industry averages. Assume there are 365 days in a year. Do not round intermediate calculations. Round your answers to two decimal places.

Current ratio of __ times is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower or than equal to) the ratio in the previous year.

Quick ratio of ___ times is (Select-higher than or lower than or equal to) the industry average and -(Select-higher than or lower than or equal to) the ratio in the previous year.

Inventory turnover ratio of___ is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Average collection period of___ days is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Debt ratio of ___ % is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Times-interest-earned ratio of____ is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Return on equity ratio of___ % is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Return on assets ratio of ___ % is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Operating profit margin ratio of ____ % is (Select-higher than or lower than or equal to) the industry average and (Select-higher than or lower than or equal to) the ratio in the previous year.

Net profit margin ratio of ___ % is (Select-higher than or lower than or equal to) the industry average and -(Select-higher than or lower than or equal to) the ratio in the previous year.

Answer 1

1) cuurent ratio ;-

Current ratio = current assets / current liabilities

Current assets = cash + account receivables+ inventory = $600,000 + 33,000,000 + 79,500,000 = $ 113,100,000

Cuurent liabilities = accounts payable = $ 44,000,000

Note:- notes payable considered as long term debt.

Current ratio = 113,100,000 / 44,000,000= 2.57 times

The cuurent ratio of current year is higher than previous year ratio & industry average ratios

2) Quick ratio

Quick ratio = Quick assets / cuurent liabilities

Quick assets = cash + accounts receivable = 600,000 + 33,000,000 = 33,600,000

Quick ratio = 33,600,000 / 44,000,000 = 0.76 times

Quick ratio of the current year ( 0.76) is higher than previous year ratio (0.61) and lower than industry average ratio(0.81)

3) Inventory turnover ratio = sales / average inventory

Alternatively in the place of sales, we can taken also cost of goods sold figure.

Average inventory = (beginning inventory of the year + ending inventory of that year ) / 2

Average inventory =( 69,100,000 + 79,500,000) / 2 = $ 74,300,000

Inventory Turnover ratio = sales / average inventory

Inventory Turnover ratio = 209,000,000 / 74,300,000

Inventory Turnover ratio = 2.81 times

The inventory Turnover ratio of current year ( 2.81) is lower than the previous year ratio (4.0) and industry average ratio (4.5).

4) average collection period:-

Average collection period = [ accounts receivable outstanding / total credit sales ] * 365

Average collection period = [33,000,000 / 209,000,000*70%] *365

Average collection period=[ 33,000,000 / 146,300,000] *365

Average collection period = 82.33 days

The average collection period of cuurent year ( 82.33) is higher than the previous year ratio (51) and industry average ratio (52).

5) Debt ratio = total debt / total assets

Total debt = accounts payable + notes payable + long term debt

= 44,000,000 + 9,000,000 + 48,000,000 = 101,000,000

Debt ratio = 101,000,000 / 238,100,000 = 42.42%

The debt ratio of current year ( 42.42%) is higher than the previous year ratio ( 31%) and industry average ratio (42%)

6) Times interest earned ratio :-

Time interest earned ratio = Earnings before interest / interest amount

= 15,000,000/ 9,000,000 = 1.67 times

The times interest earned ratio of cuurent year ( 1.67) is lower than the previous year (1.7) and industry average ratio (3.5).

7) Return on equity:-

Return on equity= net income / shareholders equity

= 5,700,000/137,100,000 = 4.16%

The return equity of the current year is lower than the previous year ratio (4.4% ) and industry average ratio (14.1%).

8) Return on assets ratio:-

Return on assets ratio = net income / total assets

= 5,700,000/ 238,100,000 = 2.39%

The return on assets ratio of the current ratio (2.39%) is lower than previous year ratio (2.6%) and industry average ratio (10.4%)

9) operating profit margin ratio:-

Operating profit margin ratio= operating profit/ net sales

= 15,000,000 / 209,000,000 =7.18%

The operating profit margin ratio of the current year (7.18%) is higher than the previous year ratio (5.5%) and industry average ratio (15.2%).

10) Net profit margin ratio :-

Net profit margin ratio = Net profit/ Net sales

= 5,700,000 / 209,000,000 = 2.73%

The net profit margin ratio of the current year (2.73%) is higher than the previous year ratio (2.1%) and industry average ratio (9%).