Question

The financial statements of Zach industries for the year ended December 31, 2015 are:

Zach Industries Income Statement:
for the Year Ended December, 31, 2012      
Sales revenue   $160,100  
Less: Cost of goods sold   105,500  
Gross profits   $54,600  
Less: Operating expenses      
Selling espense   $16,500  
General and administrative expenses   10,400  
Lease expense   1,040  
Depreciation expense   9,600  
Total operating expense    $37,540  
Operating profits   $17,060  
Less: Interest expense   5,900  
Net profits before taxes   $11,160  
Less: Taxes   4,400  
Net profits after taxes   $6,760

a. Use the financial statements to complete the following table for 2015. Assume the industry averages given in the table are applicable for 2014 and 2015.

Ratio Industry average   Actual 2014 Actual 2015 (?)
Current ratio 1.81 1.85      
Quick ratio 0.71 0.79      
Inventory turnover* 2.50 2.59      
Average collection period*   38.6 days 37.6 days      
Debt ratio 64.5% 66.5%      
Times interest earned ratio 3.9 4.1      
Gross profit margin 38% 40%      
Net profit margin 3.6% 3.7%      
Return on total assets 4.1% 4.1%      
Return on common equtiy 9.7% 8.2%      
Market/book ratio 1.7 1.8  

b. Analyze Zach industries' financial condition as it is related to (1) liquitidy (2) activity (3) debt (4) profitability, and (5) market. Summarize the company's overall financial condition.

Answer 1

1) Liquidity ratios are current and quick ratios.

The liquidity ratios have improved in comparison to the last year. The quick ratio has also improved. This shows that the liquidity position of the company is improving.

2) The activity ratios have also improved. The inventory turnover ratio, shows the efficiency in maanging the company stock to generate sales. So, the efficiency of the company has improved in transforming the inventories into sales.

3) The debt ratio has increased. The increasing of the debt ratio, depicts that the company is raising higher levels of debt , which might not be a problem as the times interest earned ratio has improved, which shows that the company has an increased ability to pay interest on debt as it becomes due.

4) The net profit margin and the gross porfit margin has also improved in comparison to the last year, which indicates that the company is profitable.

5) The market to book ratio has also imrpoved, which indicates that the market price of the company has increased. This also indicates that the company is gaining confidence in the eyes of the investor.