Baker & Co. has applied for a loan from the Trust Us Bank to invest in several potential opportunities. To evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank:
Balance Sheet 12/31/13 12/31/14
Cash $305 270
Accounts receivable 275 290
Inventory 600 580
Current assets 1,180 1,140
Plant and equipment 1,700 1,940
Less: acc depr (500) (600)
Net plant and equipment 1,200 1,340
Total assets $2,380 $2,480
Liabilities and Owners' Equity
Accounts payable $150 $200
Notes payable 125 0
Current liabilities 275 200
Bonds 500 500
Owners' equity
Common stock 165 305
Paid-in-capital 775 775
Retained earnings 665 700
Total owners' equity 1,605 1,780
Total liabilities and owners' equity $2,380 $2,480
Income Statement
Sales (100% credit) $1,100 $1,330
Cost of goods sold 600 760
Gross profit 500 570
Operating expenses 20 30
Depreciation 160 200
Net operating income 320 340
Interest expense 64 57
Net income before taxes 256 283
Taxes 87 96
Net income $169 $187
Compute the following ratios:
2013 2014 Industry Norms
Current ratio 5.0
Acid test ratio 3.0
Inventory turnover 2.2
Average collection period 90 days
Debt ratio .33
Times interest earned 7.0
Total asset turnover .75
Fixed asset turnover 1.0
Operating profit margin 20%
Net profit margin 12%
Return on total assets 9.00%
Return on equity 10.43%
Answer: Industry
2013 2014 Norm Evaluation
Current ratio 4.3x 5.7x 5.0x Satisfactory
Acid test (quick) ratio 2.1x 2.8x 3.0x Improving
Inventory turnover 1.0x 1.31x 2.2x Poor
Average collection period 90 days 78.5 days 90 days Satisfactory
Debt ratio 33% 28% 33% Satisfactory
Times interest earned 5.0x 6.0x 7.0x Poor
Total asset turnover .46x .54x .75x Poor
Fixed asset turnover .92x .99x 1.00x Satisfactory
Operating Profit Margin 29.1% 25.6% 20% Satisfactory
Net profit margin 15.36% 14.06% 12.00% Poor
Return on total assets 7.1% 7.54% 9.00% Poor
Operating income return
on investments 13.45% 13.71% 15.00% Poor
Return on equity 10.6% 10.47% 13.43% Poor
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