Question

Please see the Balance Sheet and Income Statement for Fenway Fertilizer and Farm Products, Inc. for the fiscal

Year ended December 31, 2018.

Calculate the following ratios for 2018 for Fenway Fertilizer and Farm Products, Inc.:

Industry Average

a. Average Collection Period: 45 days

b. Debt Ratio: 64.7%

c. Return on Equity (ROE): 8.2%

d. Current Ratio: 1.3

Industry Average

e. Inventory Turnover: 5.7

f. Times Interest Earned (TIE): 2.3

g. Net Profit Margin: 3.6%

h. Return On Total Assets (ROA): 2.9%

e. Based on the ratios you have calculated above, does Fenway Fertilizer and Farm Products, Inc. appear to

be stronger or weaker than the industry average data? Which specific ratios led you to this conclusion?

FENWAY FERTILIZER AND FARM PRODUCTS, INC.

Income Statement for Year Ended December 31, 2018


-------------2018----------------

DOLLARS % OF SALES

Sales Revenue
3,750,000 100.00%

Cost of Goods Sold
2,600,0006 9.33%

Gross Profit
1,150,000 30.67%

Depreciation Expense
695,000 18.53%

Operating Profits (EBIT)
455,000 12.13%

Interest Expense
255,000 6.80%

Profit Before Taxes
200,000 5.33%

Less: Taxes @ 21%
42,000 1.12%

Net Profit After Taxes
158,000 4.21%

FENWAY FERTILIZER AND FARM PRODUCTS, INC.

Balance Sheet As of December 31, 2018
-------------2018----------------



DOLLARS % OF ASSETS

ASSETS:




Cash
35,000 0.65%

Accounts Receivable
775,000 14.46%

Inventories
900,000 16.79%

Total Current Assets
1,710,000 31.90%

Net Fixed Assets
3,650,000 68.10%

TOTAL ASSETS
5,360,000 100.00%


LIABILITIES AND EQUITY:

Accounts Payable
135,000 2.52%

Notes Payable
450,000 8.40%

Accruals
275,000 5.13%

Total Current Liabilities
860,000 16.04%





Long-Term Debt
3,250,000 60.63%

TOTAL LIABILITIES
4,110,000 76.68%





Common Stock
250,000 4.66%

Retained Earnings
1,000,000 18.66%

TOTAL STOCKHOLDERS' EQUITY
1,250,00023.32%







TOTAL LIABILITIES AND EQUITY
5,360,000 100.00%

Answer 1

	INCOME STATEMENT
	Sales revenue	3750000
	Cost of goods sold	2600000
	Gross profit	1150000
	Depreciation expense	695000
	Operating profits (EBIT)	455000
	Interest expense	255000
	Profit before taxes	200000
	Less: Taxes at 21%	42000
	Net profit after taxes	158000
	BALANCE SHEET
	ASSETS
	Current Assets:
	Cash	35000
	Accounts receivable	775000
	Inventories	900000
	Total current assets		1710000
	Net fixed assets		3650000
	TOTAL ASSETS		5360000
	LIABILITIES AND EQUITY
	Current liabilities:
	Accounts payable	135000
	Notes paybale	450000
	Accruals	275000
	Total current liabilities		860000
	Long term debt		3250000
	TOTAL LIABILITIES		4110000
	Common stock	250000
	Retained earnings	1000000
	TOTAL STOCKHOLDERS' EQUITY		1250000
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		5360000
	RATIOS:	FENWAY FERTILIZER		INDUSTRY AVERAGE
		CALCULATION	RATIO
a)	Average collection period (Days)	=775000*365/3750000 =	75	45
b)	Debt ratio	= 4110000/5360000 =	76.7%	64.7%
c)	Return on equity	= 158000/1250000 =	12.6%	8.2%
d)	Current ratio	= 1710000/860000 =	2.0	1.3
e)	Inventory turnover	= 2600000/900000 =	2.9	5.7
f)	Times interest earned	= 455000/255000 =	1.8	2.3
g)	Net profit margin	= 158000/3750000 =	4.2%	3.6%
h)	Return on total assets	= 158000/5360000 =	2.9%	2.9%
	COMPARISON WITH INDUSTRY AVERAGE:
	Liquidity:
	Fenway has a higher current ratio of 2, which is the general standard. Hence, its liquidity position appears
	to be better than the industry. However, this has to be correlated with the asset management ratios.
	Asset management:
	The ACP is higher indicating higher investment in inventory signalling poor receivables management.
	The inventory turnover ratio is much lower than industry average indicating poor inventory management.
	Hence, asset management is below par and needs improvement. Further, this indicates that the current
	is higher due to more than normal investment in receivables and inventory.
	Solvency:
	The debt ratio is higher indicating very high leverage because of which TIE is lower.
	Hence, the solvency position is weak.
	Profitability:
	Return on total assets is same as the industry average and the net profit margin is higher.
	This indicates higher profitability.
	The ROE is also higher.
	OVERALL ASSESSMENT:
	The solvency postion and asset management are weak. The liquidity position, though appearing stronger,
	may be due to the higher investment in receivables and inventory. Hence, cannot be considered
	as a strength.
	However, the profitability postion is better.
	Hence, the overall assessment is that FENWAY is weaker compared to the industrry.