Question

Use this information for New Tech Company to answer the following question. You may (or may not) need to fill in missing information.

          NEW TECH COMPANY

Income Statement	2010	2011	2012
Sales	100	110	120
Cost of goods sold	50	51	52
Depreciation	20	20	20
General, sales & admin expenses	70	65	60
Taxes	10	10	10
Net Income
Balance Sheet	2010	2011	2012
Current Assets	40	45	40
Property, plant & equipment	60	55	60
Total Assets
Current Liabilities	40	40	35
Long-Term Liabilities	10	10	15
Equity	50	50	50
Total Liabilities & Equity

INDUSTRY AVERAGE RATIOS

	2010	2011	2012
CR (Current Ratio)	1.5	1.5	1
DR (Debt Ratio)=TL/TA	60%	60%	60%
TAT (Total Asset Turnover)	2	2.2	2.5
PM (Profit Margin)	4%	5%	6%
Sales Growth	3%	2.50%	3%
Profit Growth	5%	25%	20%

Which of the following items characterize New Tech Company? (It may be more than one option).

EXPLAIN (and report your calculations) (15 points)

1. High debt & unprofitable
2. Low debt & unprofitable
3. Decreasing profit margin
4. High Asset Utilization Performance
5. Low Asset Utilization Performance
6. Increasing sales with a decreasing sales growth rate
7. 1, 3 and 5 characterize New Tech Company

Answer 1

I have shown the calculation below ( Previous year is taken as the base year of calculation)

Sales	100	110	120
COGS	50	51	52
Depreciation	20	20	20
Sales and Admin expense	70	65	60
Taxes	10	10	10
Net Income	-50	-36	-22
CA	40	45	40
Plant	60	55	60
Total Assets	100	100	100
Current liab	40	40	35
Long term debt	10	10	15
Equity	50	50	50
total Liab & EUQITY	100	100	100
current ratio	1	1.125	1.142857
Debt Ratio	50%	50%	50%
TAT	1	1.1	1.2
Profit Margin	-50%	-33%	-18%
Sales growth	0%	10%	9%
profit growth	0%	-0.66%	-54%

By looking as the above calculations it can be said the company is using 50 % debt and is running under loss so we can agree to the point that compared to the industrial average of 60 % the company has less debts so New Tech company is running on low debt and unprofitable ( debt does not include equity ) . As you can see the profit margin which is negative and is decreasing this signifies that the losses are decreasing thus point 3 cannot be correct.

By looking at the current ratio and the TAT it is much lower than the industrial average so it can be said that the company was not able use it's assets properly. So the New tech company has low asset utilization performance.

Sales of the company did increase but if we look into the growth rate of sales, it's increasing at a decreasing rate thus, sales is increasing at decreasing sales growth rate.

So, the correct option would be 2, 5 and option 6.