Question

Case 2: Sam’s Paint and Drywall

                                                                                  

Sam's Paint and Drywall For the year ended December 31, 2019 (In thousands of dollars)
Assets			Liabilities and Net Worth
Cash	$12		Accounts Payable	$15
Inventory	41		Notes Payable-Bank	4
Accounts Receivable	18		Other	20
Total Current Assets	71		Total Current Liabilities	39
Fixed Assets:			Long Term Liabilities	41
Vehicles	10
Equipment	15
Building	22
Land	23		Total net worth (Owner’s Equity)	61
Total fixed assets	70		Total Fixed	70
Total assets	$141		Total Liability and Net worth	$141

Income Statement for Dec. 31, 2019 (In thousands of dollars) Sales                                         280 Less Cost of Goods Sold          186 Gross Margin on Sales            94 Less Operating Expenses       81 Net profit (before taxes)        13

Questions:

1. Determine each of the 5 ratios listed in the table below. Note also that a list of ratios and the equations are included in this document (at the end).
2. Evaluate each ratio against Dun and Bradstreet’s Key Business Ratios on industry norms (given on the following page).

	Ratios to Calculate	Dunn & Bradstreet Avg.
	Current Ratio = Current Assets / Current Liabilities	2.7
	Inventory Turnover = Sales / Average Inventory	6.9
	Profit to Sales = Net Profit (B4 tax) / Gross Sales	3.5%
	Return on Investment = Net Profit (B4 Tax) / Owners Equity	21%
	Debt to Equity = Total Debt / Owners Equity	4.3 : 1

Answer 1

Question 1:

a. Current ratio

Current ratio = Current Assets / Current Liabilities

Current ratio = $71,000 / $39,000 = 1.8 : 1

b. Inventory Turnover

Inventory Turnover = Cost of goods sold / Average Inventory

Inventory Turnover = $186,000 / $41,000 = 4.5 times

c. Profit to sales

Profit to sales = Net Profit (before tax) / Gross Sales * 100

Profit to sales = $13,000 / $280,000 * 100 = 4.6%

d. Return on Investment

Return on Investment = Net Profit (before tax) / Owners Equity * 100

Return on Investment = $13,000 / $61,000 * 100 = 21%

e. Debt to Equity

Debt to Equity = Total Debt / Owners Equity

Debt to Equity = ($39,000 + $41,000) / $61,000 = 1.3 : 1

Question 2:

Comparison

	Sam's Paint and Drywall	Dunn & Bradstreet Avg
Current ratio	1.8	2.7
Inventory Turnover	4.5	6.9
Profit to sales	4.6%	3.5%
Return on Investment	21%	21%
Debt to Equity	1.3 : 1	4.3 : 1

Sam's paint and drywall's liquidity is less than Dunn & Bradstreet avg by analyzing current ratio. By analyzing profitability ratio, Sam's Paint and Drywall's profitability has favorable than Dunn & Bradstreet avg. Debt to Equity ratio is favorable for Sam's paint and Drywall.

All the best...