Question

Assess Yellow Hammer’s income statement by calculating the sales growth, EBITDA profitability (EBITDA/Sales) and coverage ratios using EBIT and EBITDA for each year.   SHOW YOUR WORK (5 points)

Yellow Hammer Corporation
Income Statement
Year Ended December 31 (in $ millions)
					2020		2019		2018
Total sales					186.7		176.1		165.4
Cost of sales					153.4		147.3		140.6
Gross Profit					33.3		28.8		24.8
Selling, general, and administrative expenses					13.5		13.0		11.6
Research and development					8.2		7.6		6.4
Depreciation and amortization					1.2		1.1		1.0
Operating Income					10.4		7.1		5.8
Interest income (expense)					2.3		1.8		1.6
Pretax Income					8.1		5.3		4.2
Taxes					2.0		1.3		1.1
Net Income					6.1		4.0		3.2

Answer 1

Answer:

Sales Growth:

Sales Growth for 2020 = (186.7/176.1) - 1 = 6.02%

Sales Growth for 2019 = (176.1/165.4) - 1 = 6.47%

EBITDA profitability:

EBITDA profitability (EBITDA/Sales) = (Operating Income + Depreciation and amortization) / Sales

EBITDA profitability for 2020 = (10.4+1.2)/186.7 = 6.21%

EBITDA profitability for 2019 = (7.1+1.1)/176.1 = 4.66%

EBITDA profitability for 2018 = (5.8+1)/165.4 = 4.11%

Coverage ratios using EBIT

Coverage ratios using EBIT = Operating Income / Interest expense

Coverage ratios using EBIT for 2020 = 10.4 /2.3 = 4.52

Coverage ratios using EBIT for 2019 = 7.1/1.8 = 3.94

Coverage ratios using EBIT for 2018 = 5.8/1.6= 3.63

Coverage ratios using EBITDA:

Coverage ratios using EBITDA = (Operating Income + Depreciation and amortization) / Interest Expense

Coverage ratios using EBITDA for 2020 = (10.4+1.2)/ 2.3 = 5.04

Coverage ratios using EBITDA for 2019 = (7.1+1.1)/1.8 = 4.56

Coverage ratios using EBITDA for 2018 = (5.8+1)/1.6 = 4.25