Question

Silver Cloud Computing is a company that provides cloud computing services. The company commenced operations on March 1, 2016. It acquired financing from the issuance of common stock for $40,000,000 and issuance of 4% bonds that mature in 2026 for $30,000,000. The income statements and balance sheets for the first two years are provided in a separate Excel spreadsheet. All amounts are in thousands.

           

Required:

The Chief Executive Officer (CEO) is interested in increasing sales and decreasing expenses. You have been requested to prepare a report that provides analysis of the financial statements and recommendations to improve the financial performance of the company. Your report should include the following items:

Prepare common sized financial statements for both years and provide comments on the differences between the years.Are there any areas of concern?

Calculate the following ratios and provide an analysis of the company based on the ratios:

Days Sales Outstanding

Profit Margin

Asset Turnover

Return on Assets

Financial Leverage

Return on Equity

PPE Turnover

Total Liabilities to Equity

Times Interest Earned

		fye 2/28/2018		fye 2/28/2017
		(in thousands)		(in thousands)
Sales		$            225,000		$            200,000
Sales Discounts		3,375		2,500
Net Sales		221,625		197,500
Wages and Salaries		73,500		70,000
Bad Debt Expense		2,100		2,000
Depreciation		20,000		20,000
Marketing Expense		33,750		30,000
Occupancy Expense		54,000		54,000
Research & Development		22,500		20,000
Total Expenses		205,850		196,000
Income from Operations		15,775		1,500
Interest Expense		1,200		1,200
Income Before Taxes		14,575		300
Income Taxes (40%)		5,830		120
Net Income		$                8,745		$                    180

SILVER CLOUD COMPUTING
Balance Sheets
February 28, 2018 and 2017 and February 29, 2016
							At Inception
			Feb 28 2018		Feb 28 2017		Feb 29 2016
			(in thousands)		(in thousands)		(in thousands)
Cash			$              55,755		$       22,300.00		$        10,000
Accounts Receivable			18,000		16,000		-
Net Computer Equipment			20,000		40,000		60,000
Total Assets			$              93,755		$             78,300		$        70,000
Accounts Payable			$                9,000		$               8,000		$                  -
Taxes Payable			5,830		120		-
Long-term Debt			30,000		30,000		30,000
Common Stock			40,000		40,000		40,000
Retained Earnings			8,925		180		-
Total Liabilities & Stockholders Equity			$              93,755		$             78,300		$        70,000

Answer 1

1. Financial Leverage : 3 most common financial leverage ratios are as below:

a. Debt Equity ratio

b. Equity ratio:

c. Debt Ratio :

The financial leverage ratios calculated above show a healthy combination between debt and equity indicating that it would be a good decision for an outsider to invest in this company as it is carrying fairly less debt on its balance sheet.

2. Return on Equity:

The return on equity is positive, which is a good indication. This return should be compared with the ratios of that of its peers in order to determine if the ratio is ideal.

3. Property Plant and Equipment Turnover:

This ratio is used to measure operating performance of the company. A high ratio is generally indicative of good efficieny is managing fixed assets investments This also should be compared to ratio values of peer companies or industry averages.

4. Total liabilities to Equity

Total Liabilities = 44,830

Total Equity = 48,925

Ratio = 0.92

5. Times Interest earned

This ratio shows how many times a company is able to pay its interest using the income from operations. This gives the shareholder's confidence that the company has the ability to pay off its debt obligations while leaving some profits for equity shareholders as well.

Overall, based on the ratios calculated, the company is doing fairly well as its ratios reflect a positive financial position. To an outside person who is a potential investor, this is an ideal company as the ROE and Interest coverage ratios reflect that there will be good returns for the investor.