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

1. Quick ratio= (Cash + Marketable securities+ receivables)/ Current liabilities

= (1050 + 4830)/ (4000+ 2950+ 2300)

= 5880/9250 =0.635= 0.64

the quick ratio is the liquidity ration which measures the current assets available per current liabilities. Higher the ratio, more liquidable is the company. Here the company's quick ratio is below industry average which depicts that the Current liabilities are more than current assets.

2. Average Collection period = accounts receivable

net sales/365

= 4250   

29400/365

=4250/ 80.6 = 52.72 = 53 approx

Average collection period is known as the time taken by the business to receive payments owed by its clients (account receivables).Less the number, the more efficient is the company in recieving their money.

Here the company takes more time collect the account receivable than the industry average.

3. Debt- eqity ratio = debt/ equity

= Total liability / total shareholder's equity

Total debts = long term bonds + notes payable

=2950+5450=8400

Total shareholder's equity= 4620+1680

debt-equity ratio = 8400/6300 = 1.33

debt to equity ratio calculates the leverage of total debt to total equity. This ratio highlights the company's capital structure. Here the company's debt-equity ratio is below the industry average, which shows that the company has more debts and less equity.

4. Return to equity = Net income/ shareholder's equity

= 565/6300= 0.089 = 8.9%

The return to equity shows how the company is utilising the shareholder's money efficiently. It measures the profitability of the organsation in terms of the shareholder's equity. Higher the ROE, higher the efficiency.

Here the ROE is below the industry average of 17% which shows that the company is not efficiently utilising the shareholder's equity.