Question

The financial statements for XYZ Inc. are shown below.

Income Statement and other info:

2020 2019

Year-end stock price 60 50

# of shares 5600 3600

XYZ Inc. Income Statement

2020 2019

Sales 900,000 960,000 850,000

COGS 640,000 610,000

Gross Profit 320,000 240,000

Operating costs (excluding depreciation) 70,000 50000 60,000

EDITDA 180,000 270,000 180,000

Depreciation 15,000 20,000 18,000

EBIT 165,000 250,000 162,000

Interest Expense 100,000 100000 100,000

EBT 65,000 150,000 62,000

Taxes 19,500 25,000 5,000

Net Income 45,500 125,000 57,000

Common Dividends 4,550 6000 3000

Addition to Retained Earnings 40,950 119,000 54,000

Balance Sheet

Assets 2018 2017 2020 2019

Cash and Cash Equivalents 40,000 30,000 66,000 128,000

Short term Investments 4,500 8,500 10,500 9000

Accounts Receivable 166,000 190,000 164,000 242,950

Inventories 80,000 70,000 100,000 80,000

Total current assets 290,500 298,500 340,500 459,950

Net Fixed Assets 115,000 90,000 115,000 90,000

Total Assets 405,500 388,500 455,500 549,950

Liabilities and Equity 2017 2016 2020 2,019

Accounts Payable 17,000 14,500 17,000 12,500

Accruals 18,500 14,000 18,500 13,000

Notes Payable 11,000 4,000 11,000 4,000

Total Current Liabilities 46,500 32,500 46,500 29,500

Long term debt 133,000 186,950 133,000 186,950

Total Liabilities 179,500 219,450 179,500 216,450

Common Stock 146,000 130,000 126,000 132,000

Retained Earnings 80,000 39,050 150,000 201,000

Total Common Equity 226,000 169,050 276,000 333,000

Total Liabilities and Equity 405,500 388,500 455,500 549,450

a. Find all of the ratios below:

2020 IA

Liquidity Ratios 3.5

Current Ratio 2

Quick Ratio

Asset Management Ratios

Inventory Turnover 25.39

Days Sales Outstanding 55.08

Total Assets Turnover 2.7

Debt Ratios

Debt Ratio 35%

TIE Ratio 6.5

Debt to Equity Ratio

Profitability Ratios

Profit Margin 12%

Return on Assets 13.50%

Return on Equity 15%

Market Ratios

EPS N/A

P/E ratio 14.78

b. Write a synopsis on how this company compares with the industry in each section of ratios.

c. Perform a DuPont analysis for XYZ Inc.

ROE = PM * TA Turnover * Equity Multiplier

2020

2019

d. Explain the results in part c.

Answer 1

A. Ratio of XYZ are for 2020.

	XYZ	IA
Current Ratio	7.32	3.50
Quick Ratio	5.17	2.00
Inventory Turnover	7.11	25.39
Days Sales Outstanding	81.39	55.08
Total Asset Turnover	1.79	2.70
Debt ratio	32%	35%
TIE	1.65	6.50
Profit Margin	5.06%	12%
RoA	9.05%	13.50%
RoE	14.94%	15%
EPS	8.13
P/E Ratio	7.38	14.78

B.

The liquidity ratio represents company's ability to continue its operation and to meet its short term obligations. The XYZ has almost twice the current and quick ratio as compared to industry average which shows that XYZ is comparatively in better position to meet it near term obligations.

The company fares poor in activity ratio as compared to IA. The higher inventory turnover ratio shows the company is quickly clearing its inventory. The XYZ has much lower inventory turnover which shows the demand of its goods is slowing and not matching up with IA. The DSO ratio shows the no of days in which the debtors give the money. The lower the better as money is tied up for less duration with debtors. The XYZ has more DSO than IA which means it takes more days to collect payment from debtors and can lead to cash crunch. The Total asset turnover is less which means it' asset are not generating the return efficiently.

The XYZ has debt ratio somewhat lower than IA which shows that it is relatively better as it has less leverage. However, TIE or times interest earned ratio shows the company ability to repay the interest on debt. The company has TIE ratio of just above 1 which is alarming. The other companies in the industry is in much better position.

The company also has less profitability margin and return on asset which shows that it lacks operational efficiency as its cost are more compared to IA. The RoE is similar to that of IA.

Overall, XYZ is in good position to meet its operational and short term liability however the company lags behind in operational efficiency and activity(asset management) ratios and has alarming low TIE ratio which shows company may have future financial troubles. Also, P/E ratio of company is less which means investor are paying less for dollar of earning as compared to IA. That is justified due to above mentioned reasons.

C.

XYZ	2019	2020
PM	13%	5.06%
TA Turnover	2.01	1.79
Equity Multiplier	1.71	1.65
RoE	44.72%	14.93%

D.

Dupont Ratio divides the Return on Equity ratio in 3 parts- Profitability Margin, Total Asset Turnover and Equity Multiplier.

So in 2019 RoE was 44.72 % which was way higher than 14.93% in 2020. The main reason for higher RoE in 2019 was better profitability margin and total asset turnover ratio. This shows that firm had better operational efficiency in 2019 which led to higher returns and RoE.