Question

You have obtained the fi nancial statements of Day Manufacturing and Night Production, two companies

in the manufacturing industry. You have acquired the following information for an analysis of the companies

(amounts in thousands):

Day Manufacturing Night Production

2020 2019 2020 2019

Cash $ 24 $ 21 $ 37 $ 35

Accounts receivable 273 196 280 230

Inventory 182 140 154 120

Prepaid expenses 7 6 5 7

Capital assets (net) 480 400 322 224

Current liabilities 154 175 170 140

Long-term debt 280 308 288 236

Share capital—common shares 140 140 120 120

Retained earnings 392 140 220 120

Sales (all credit sales) 2,660 1,820 1,750 1,680

Cost of goods sold 1,750 1,260 1,274 1,260

Interest expense 28 31 29 24

Taxes (30%) 108 78 90 78

Net income 252 182 210 182

a. Calculate the following ratios for the two companies for the two years. For 2019, assume the current

year amount is equal to the average where required.

i. Current ratio

ii. Accounts receivable turnover

iii. Inventory turnover

iv. Debt to equity

v. Interest coverage

vi. Gross margin

vii. Profi t margin

viii. Return on assets

ix. Return on equity

b. Write a brief analysis of the two companies based on the information given and the ratios calculated.

Be sure to discuss issues of short-term liquidity, activity, solvency, and profi tability. Which

company appears to be the better investment for the shareholder? Explain. Which company appears

to be the better credit risk for the lender? Explain. Is there any other information you would like to

have to complete your analysis?

Answer 1

i. Current ratio = Current Assets / Current Liabilities

Day Manufacturing :

2020 = (24 + 273 + 182 + 7 ) / 154 = 3.16

2019 = ( 21 + 196 + 140 + 6 ) / 175 = 2.07

Night Production

2020 = ( 37 + 280 + 154 + 5 ) / 170 = 2.8

2019 = ( 35 + 230 + 120 + 7 ) / 140 = 2.8

ii. Accounts receivable turnover = Sales / Avg. Accounts Receivable

Day Manufacturing :

2020 = 2660 / ( 273 + 196 ) / 2 = 2660 / 234.50 = 11.34

2019 = 1820 / 196 = 9.29

Night Production

2020 = 1750 / ( 280 + 230 ) / 2 = 1750 / 255 = 6.86

2019 = 1680 / 230 = 7.30

iii. Inventory turnover = Cost of goods sold / Avg. Inventory

Day Manufacturing :

2020 = 1750 / ( 182 + 140 ) / 2 = 1750 / 161 = 10.87

2019 = 1260 / 140 = 9

Night Production

2020 = 1274 / ( 154 + 120 ) / 2 = 1274 / 137 = 9.30

2019 = 1260 / 120 = 10.50

iv. Debt to equity = Total Liabilities / Total Equity

Day Manufacturing :

2020 = (154 + 280 ) / ( 140 + 392 ) = 434 / 532 = 0.82

2019 = ( 175 + 308 ) / ( 140 + 140 ) = 483 / 280 = 1.73

Night Production :

2020 = (170 + 288 ) / ( 120 + 220 ) = 458 / 340 = 1.35

2019 = ( 140 + 236 ) / ( 120 + 120 ) = 376 / 240 = 1.57

v. Interest coverage = EBIT / Interest Expense

Day Manufacturing :

2020 = ( 2660 - 1750 ) / 28 = 32.5 times

2019 = (1820 - 1260 ) / 31 = 18.06 times

Night Production :

2020 = (1750 - 1274) / 29 = 16.41 times

2019 = ( 1680 - 1260 ) / 24 = 17.5 times

vi. Gross margin = Gross profit / Sales

Day Manufacturing :

2020 = ( 2660 - 1750 ) / 2660 = 34.21%

2019 = (1820 - 1260 ) / 1820 = 30.77%

Night Production :

2020 = (1750 - 1274) / 1750 = 27.2%

2019 = ( 1680 - 1260 ) / 1680 = 25%

vii. Profit margin = Net Income / Sales

Day Manufacturing :

2020 = 252 / 2660 = 9.47%

2019 = 182 / 1820 = 10%

Night Production :

2020 = 210 / 1750 = 12%

2019 = 182 / 1680 = 10.83%

viii. Return on assets = Net Income / Avg. Total Assets

Day Manufacturing :

2020 = 252 / (24 + 273 + 182 + 7 + 480 + 21 + 196 + 140 + 6 + 400) / 2 = 252 / 864.50 = 29.15%

2019 = 182 / (21 + 196 + 140 + 6 + 400) = 182 / 763 = 23.85%

Night Production :

2020 = 210 / ( 37 + 280 + 154 + 5 + 322 + 35 + 230 + 120 + 7 + 224 ) / 2 = 210 / 707 = 29.7%

2019 = 182 / (35 + 230 + 120 + 7 + 224 ) = 182 / 616 = 29.55%

ix. Return on equity = Net Income / Avg. Total Equity

Day Manufacturing :

2020 = 252 / (140 + 140 + 140 + 392 ) / 2 = 252 / 406 = 62.07%

2019 = 182 / ( 140 + 392 ) = 182 / 532 = 34.21%

Night Production :

2020 = 210 / ( 120 + 120 + 120 + 220 ) / 2 = 210 / 290 = 72.41%

2019 = 182 / 340 = 53.53%