Question

1- Emery Corporation is a machinery manufacturing company located in Morganton, NC, USA. The company’s management wanted to measure their performance compared to the Industry (Table 2). Using the latest Financial statements, which is given on Page 2 (Table 1) calculate the following performance measures:

a) Current Ratio

b) Quick Ratio

c) Average Collection Period

d) Operating Return on Assets

e) Total Asset Turnover

f) Inventory turnover

g) Debt Ratio

h) ROE

i) Price Earnings Ratio

2- Interpret the results (refer to Table 2)

Table 1: Financial Statements

Emery Corporation

Financial Statements

For the year ended December 31, 2019

Balance Sheet			Income Statement
Assets:
Cash	$370,000		Sales (all credit)	$8,120,000
Accounts receivable	570,000		Cost of goods sold	(4,000,000)
Inventory	620,000		Operating expense	(2,900,000)
Net fixed assets	2,220,000		Interest expense	(150,000)
Total assets	$3,780,000		Income taxes	(380,000)
			Net income	$690,000
Liabilities and owners' equity:
Accounts payable	$220,000
Long-term Notes payable	570,000
Long-term debt	1,170,000
Owners' Equity	1,820,000
Total liabilities and owner's equity	$3,780,000		Earnings Per Share	2.40

Market price per share = 33

Table 2: Industry Average

Ratio	Industry Average
Current Ratio	7.49
Quick Ratio	5.25
Average Collection Period	31.87 Days
Operating Return on Assets	34%
Total Asset Turnover	3.15 X
Inventory turnover	7.45X (50 Days)
Debt Ratio	50%
ROE	41%
Price Earnings Ratio	14.09 X

Answer 1

1: -

A) Current ratio =current asset /current liabilities

Current asset = inventory +account receivable + cash equivalent + cash

Current liabilities = accrual + account payable + notes payable

                       =1560000/220000

                      =7.09

B) Quick ratio =quick asset / current liabilities

Quick asset= cash + short term marketable securities + account receivable

                   =940000/220000

                   =4.27

C) Average collection period =account receivable / (net sale/365)

                                          =570000/ (8120000/365)

                                         =25.62 days

D) Operating return on asset = operating income/asset

operating income = EBIT

                                         = 1220000/3780000

                                         = 0.32 (32%)

E) Asset turnover ratio = revenue/ asset

                                 = 8120000/3780000

                                 = 2.14

F) Inventory turnover ratio = cost of goods sold / average inventory

                                       = 4000000/620000

                                      =6.45 (days)

G) Debt ratio = total liabilities / total asset

                 =1960000 / 3780000

                 = 0.51 (51%)

H) ROE = net income (annual) / shareholder’s equity

         = 690000/ 1820000

        = 0.37 (37%)

I) Price earning ratio = market price per share / earning per share

                              = 33/ 2.40

                              = 13.75

                                                                             

2: - a) Emergy corporation has current ratio of 7.09. the industry average current ratio is 7.49. there is only a little bit difference when comparing to the industry average

b) Emergy corporations has a quick ratio of 4.27, when we are comparing the quick ratio with industry average, 5.25 is the industry average. Emergy corporation has a lower quick ratio than industry

c) Average collection period is 25. 62 days that means it takes 26 days to an average debtor collection. The industry average is 31.87 days

d) Its operating return on asset is equal to 32%. Industry average is 34%

e) Emergy corporation has an asset turnover ratio of 2.14. when we are comparing the asset turnover ratio with industry it is lower than industry average. industry average is 3.15

f) Emergy corporation inventory turnover ratio is 6.45. industry average is 7.45

g) The debt ratio of the emergy corporation is 51% and its industry average is only 50 %. The company has 1 more debt ratio than industry average

h) Return on equity is 0.37 that means 37% and its industry average is 41%. There is a 4% difference

i) Emergy corporation has a PE ratio of 13.75. its industry average is 14.09. There is only a small difference between industry average and emergy corporations PE ratio

When we are comparing the Emergy corporation with industry average, most of the performance measure are pretty closer to the industry average. so that we can say emery corporation is performing well.