Question

															Industry Average
Financial Ratios						2015			2016			2017
	Liquidity
		Accounts receivables turnover (times)					8.08			6.34			5.11		9.4
		Average Collection Period (days)					45.17			57.59			71.46		38.8
		Inventory turnover (times)					7.81			5.85			4.54		3.8
		Average days in inventory (days)					46.73			62.37			80.35		96.1
		Current ratio (times)					2.04			1.70			1.53		1.6
		Quick or Acid-test ratio (times)					0.99			0.80			0.71		0.8
	Solvency
		Debt to Equity Ratio					94.7%			164.1%			229.8%		0.667
		Times interest earned (times)					5.99			4.26			4.19		3.4
	Profitability
		Gross profit ratio (%)					29.7%			29.5%			29.8%		5.4%
		Profit margin (%) [before tax]					2.2%			2.5%			3.5%		4.4%
		Asset Turnover					2.26975906			1.977221			1.705226		1.8
		Return on assets (%) [before tax]					7.5%			7.5%			9.0%		8.0%
		Return on equity (%) [before tax]					14.7%			19.8%			29.6%		17.10%
		Price to earnings ratio					$ 24.46			$18.62			$10.37
Cash Flow Statement									2016			2017
Cash, beginning of year									$ 1,512.00			$ 1,176.00
Operating Activities
	Net Income								$ 1,627.00			$ 2,827.00
	Plus Depreciation								$    908.00			$ 1,292.00
	Minus increase in accounts receivable								$ (4,034.00)			$ (5,648.00)
	Minus increase in inventory								$ (3,302.00)			$ (4,732.00)
	Minus increase in prepaid expenses								$ (1,360.00)			$ (1,700.00)
	Plus increase in accounts payable								$ 2,388.00			$ 3,997.00
	Plus increase in income taxes payable								$    252.00			$       -
	Plus increase in accruals & other cur. Liab.								$ 1,365.00			$ 1,656.00
		Net Cash from operating activities							$ (2,156.00)			$ (2,308.00)
Investment Activities
	Fixed asset acquisitions								$ (2,780.00)			$ (3,838.00)
	Change in intangible assets								$    (21.00)			$    (17.00)
	Change in all other noncurrent activities								$   (467.00)			$   (195.00)
		Net Cash from investing activities							$ (3,268.00)			$ (4,050.00)
Financing Activities
	Change in notes payable								$ 2,038.00			$ 3,080.00
	Change current maturities--L.T.D.								$    452.00			$    786.00
	Change in long-term debt								$ 3,160.00			$ 3,250.00
	Change in Com Stock & paid-in cap								$       -			$       -
	Dividends paid								$   (562.00)			$   (837.00)
		Net Cash from financing Activities							$ 5,088.00			$ 6,279.00
Net Change in Cash									$   (336.00)			$    (79.00)
Cash, end of year									$ 1,176.00			$ 1,097.00

4. What is your assessment of the manner in which HTCM is managing its assets? Pay attention to both trends and industry averages.

SOLVENCY (Financing of Assets)

5. What is your assessment of the manner in which HTCM is financing its assets? Pay attention to both trends and industry averages. What is the relationship between the debt to equity ratio and times interest earned as these relate to HTCM? And is there any other possible explanation (outside of the firm’s financial statements) for the observed trend in times interest earned?

PROFITABILITY

6. What can you say about HTCM’s gross profit ratio and net profit ratio? Explain any patterns observed.

7. How are HTCM’s net profit ratio, and asset turnover ratio affecting the firm’s pre-tax return on assets (ROA) and return on equity (ROE)? What is your overall assessment of the firm’s profitability, including its earnings per share (EPS)?

CASH FLOW

8. Referring to HTCM’s statement of cash flow for 2016 and 2017, assess HTCM’s cash flow situation noting both inflows and outflows?

OVERALL EVALUATION

9. Based on your answers to the questions above, what is your overall evaluation of HTCM’s financial condition? (Pull all your analysis together in answering this question.)

10. What is the market’s assessment of HTCM’s financial condition? Explain. Does the market’s assessment confirm or refute your analysis?

11. Based on your evaluation of HTCM and the market’s assessment of the firm, would you accept employment with the company? Explain.

Answer 1

4. Assessment of the manner in which HTCM is managing its assets:

Accounts receivable turnover has decreased over the years from 8.08 in 2015 to 5.11 in 2017. The receivable turnover ratio is much lower than industry average of 9.4. The collection period is also much higher than industry average. This indicates less than efficient management of receivables

The inventory turnover is higher than industry average of 3.8.However, the inventory turnover has decreased over the years from 7.81 in 2015 to 4.54 in 2017.

The average days in inventory is lower than the industry average of 96.1 days.

The management of inventory of HTCM appears to be more efficient than the industry average.

Current ratio and Quick ratios are slightly less than the industry average. These ratios have decreased over the three years. However, liquidity appears to be adequate . HTCM will be able to meet its short term payment obligations

5. Assessment of the manner in which HTCM is financing its assets:

The Debt Equity ratio is increasing over the years. The ratio was 0.947 in 2015 and increased to 2.298 in 2017.Debt of the company is increasing over time .The industry average Debt Equity ratio is 0.667. For HTCM, the ratio is much higher than industry average. This indicates that HTCM has higher risk than industry average.

Times interest earned( Ratio of Earning before interest and taxes to total interest expenses) is 4.19,which is higher than industry average of 3,4.

However, this ratio of HTCM has decreased over the three year period from 5.99 to 4.19

The Times interest earned ratio of HTCM indicates that its annual earnings are sufficient to meet interest obligations.

6. Assessment HTCM’s gross profit ratio and net profit ratios:

Gross profit margin of HTCM during all the three years is much higher than the industry average. But the net profit margin is lower than the industry average.

This indicates high operating costs and low cost of goods sold compared to Sales revenue.

Gross profit margin has been more than 29% against the industry average of 5.4%.This indicates that HTCM is able to procure goods at much lower costs.

But due to hight operating costs, the net profit margin of 3.5% in 2017 is lower than industry average of 4.4%. The profit margin has improved from 2.2% in 2015 to 3.5% in 2017.

7.

Return on Assets(ROA) =(Net Profit Margin)* (Asset Turnover Ratio)

Asset turnover ratio has decreased over time. In 2017,Asset turnover ratio at 1.7 is alishtly lower than industry average of 1.8

Net Profit Margin is also lower than industry average.

These two ratios are lowering the ROA which was 7.5% in 2015 and 2016 . It slightly improved to 9% in 2017 against industry average of 8%

Return on Equity (ROE)=(Return on Assets(ROA))*(Leverage)

Leverage=(Total assets/ Shareholders Equity)

Leverage of this company is high with high Debt toEquity ratio.

This has increased the ROE which is 29.6% in 2017 compared to industry average of 17.1%

Overall, the company is profitable with high Return on Equity .Since return on equity is high, EPS is also high.