Question

II. Below are the financial statements for Trust Inc. Use the statements to answer the questions that follow (8 Points)

Balance Sheet (Millions of $)
Assets
Cash 1,050
Accounts receivable 4,830
Inventories 6,450
Net plant and equipment 8,670
Total assets 21,000

Liabilities and Equity
Accounts payable 4,000
Notes payable 2,950
Accruals 2,300
Long-term bonds 5450
Common stock 1,680
Retained earnings 4,620
Total liabilities and equity 21,000

Income Statement (Millions of $)
Net sales 29,400
Operating costs 27,500
Depreciation 515
Interest 520
Taxes 300
Net income 565


Use the financial statements above to:
a. Calculate the ratios given in the table below
b. Interpret the ratios that you calculate
c. Explain the significance of the calculated ratios compared to the industry average

Ratio                                                          Industry Average
Quick ratio                                                     1.25
Average collection period                            40
Debt-to-equity ratio                                       3
Return on equity                                  17%

Answer 1

a]	RATIO	Trust Inc	Industry
		Calculation	Value
	Quick Ratio [(Cash+Accounts receivble)/(Accounts payable+NP+Accruals]	= (1050+4830)/(4000+2950+2300) =	0.64	1.25
	Average collection period [AR*365/Sales]	=4830*365/29400 =	60	40
	Debt to equity ratio [Total debt/Total equity]	= (4000+2950+2300+5450)/(1680+4620) =	2.33	3
	Return on equity [NI/Equity]	=(565/6300) =	8.97%	17%
b]	The quick ratio tells how many times the quick assets [that is assets that can be realized without much delay, but
	excluding inventory] is compared to the current liabilities. It tells us whether the firm will be able to meet its
	immediate obligations if, there is a call to do so.
	The average collection period tells how many days' sales is outstanding in the receivables or in other words how
	many days' sales still remains to be collected. When compared with the credit period allowed, it tells how well
	the firm is managing its receivables.
	The debt to equity ratio reflectes the financial leverage; the proportion of borrowed capital to owners' capital. It
	signifies the risk undertaken by the firm and its creditors.
	ROE measures the return on the shareholders' funds. It is a measure of the operational efficiency and financial
	management effectiveness of the management.
c]	The acid test ratio is only half the industry average. It suggests a precarious postion and indicates that the
	firm is moving towards bankruptcy. In contrast the industry is maintaining a safe position.
	The ARO is very high and suggest inefficient management of receivables. The firm's ratio is 1.5 times the industry
	average ratio.
	The D/E ratio is comfortable as the ratio is less than that of the industry.
	The ROE is very low compared to the industry. Partly the lower D/E may be the casue. But the major reasons may
	be the lower gross and net margins, for which details are not available.