Question

Salza Technology Corporation

Annual Income Statements (in $ Thousands)

	2012	2013
Net sales	$375	$450
Less: Cost of goods sold	-225	-270
Gross profit	150	180
Less: Operating expenses	-46	-46
Less: Depreciation	-25	-30
Less: Interest	-4	-4
Income before taxes	75	100
Less: Income taxes	-20	-30
Net income	$ 55	$70
Cash dividends	$ 17	$ 20

Balance Sheets as of December 31 (in $ Thousands)

	2012	2013
Cash	$ 39	$ 16
Accounts receivable	50	80
Inventories	151	204
Total current assets	240	300
Gross fixed assets	200	290
Less accumulated depreciation	−95	−125
Net fixed assets	105	165
Total assets	$345	$465
Accounts payable	$ 30	$ 45
Bank loan	20	27
Accrued liabilities	10	23
Total current liabilities	60	95
Long-term debt	15	15
Common stock	85	120
Retained earnings	185	235
Total liabilities and equity	$345	$465

2. [Liquidity and Financial Leverage Ratios] Refer to the Salza Technology Corporation in Problem 1.

A.     Using average balance sheet account data, calculate the (a) current ratio, (b) quick ratio, (c) total-debt-to-total-assets ratio, and (d) the interest coverage ratio for 2013.

           

     

B.     Repeat the ratio calculations requested in Part A separately for 2012 and 2013 using year-end balance sheet account data. What changes, if any, have occurred in terms of liquidity and financial leverage?

Answer 1

1,A,

1. Current Ratio= Average current assets/Average Current Liabilities

Average current Assets=$240 +$300/2=$270

Average current Liabilities=$60+$95/2=$77.50

Therefore Current Ratio=$270/$77.50=3.48 Times

b) Quick Ratio= Average current Assets-Average Inventories- Short term Marketable      securities/Average current Liabilities

=($240 +$300/2)-($151+$204/2) /$60+$95/2=1.19 Times

c) total debt to total asset ratio = Average total debt/Average total assets

=($60+$95)/2 + ($15+$15)/2 / ($345+$465)/2=$92.50/$405=22.84%

d)Interest coverage ratio: Average earnings before interest and taxes depreciation /Average Interest

EBITDA = Net sales – Cost of goods sold- operating expenses

2012=$375-$225-$46=$104

2013=$450-$270-$46=$134

Interest Coverage Ratio=($104+$134/2 ) /($4 +$4)/2=29.75 Times

1 B

1. Current Ratio:

2012=$240/$60=4 Times

2013=$300/$95=3.16 Times

1. Quick ration:

2012=($240-$151)/$60=1.48 Times

2013=($300-$204)/$95=1.01 Times

1. Total debt to total assets ratio

2012=($60+$15/$345)=21.74%

2013=($95+$15)/$465=22.66%

1. Interest Coverage Ration:

2012=($375-$225-$46)/$4=26 Times

2013 ($450-$270-$46)$4=33.50 Times