Assume that you recently graduated and have just reported to work as an investment advisor at the one of the firms on Wall Street. You have been presented and asked to review the following Income Statement and Balance Sheets of one of the firm's clients. Your boss has developed the following set of questions you must answer.
Income Statements and Balance Sheet
|
Balance Sheet
|
2012
|
2013
|
2014
|
|
Cash
|
$9,000
|
$7,282
|
$14,000
|
|
Short-term investments
|
48,600
|
20,000
|
71,632
|
|
Accounts receivable
|
351,200
|
632,160
|
878,000
|
|
Inventories
|
715,200
|
1,287,360
|
1,716,480
|
|
Total current assets
|
$1,124,000
|
$1,946,802
|
$2,680,112
|
|
Gross fixed assets
|
491,000
|
1,202,950
|
1,220,000
|
|
Less* Accumulated depreciation
|
146,200
|
263,160
|
383,160
|
|
Net fixed assets
|
$344,800
|
$939,790
|
$836,840
|
|
Total assets
|
$1,468,800
|
$2,886,592
|
$3,516,952
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
Accounts payable
|
$145,600
|
$324,000
|
$359,800 300,000 380,000
|
|
Notes payable
|
200,000
|
720,000
|
|
Accruals
|
136,000
|
284,960
|
|
Total current liabilities
|
$481,600
|
$1,328,960
|
$1,039,800
500,000
|
|
Long-term debt
|
323,432
|
1,000,000
|
|
Common stock (100,000 shares)
|
460,000
|
460,000
|
1,680,936
|
|
Retained earnings
|
203,768
|
97,632
|
296,216 $1,977,152 $3,516,952
|
|
Total equity
|
$663,768
|
$557,632
|
|
Total liabilities and equity
|
$1,468,800
|
$2,886,592
|
|
Income Statements
|
2012
|
2013
|
2014
|
|
Sales
|
$3,432,000
|
$5,834,400
|
$7,035,600
|
|
Cost of goods sold except depr.
|
2,864,000
|
4,980,000
|
5,800,000 120,000 612,960
|
|
Depredation and amortization
|
18,900
|
116,960
|
|
Other expenses
|
340,000
|
720,000
|
|
Total operating costs
|
$3,222,900
|
$5,816,960
|
$6,532,960
$502,640
|
|
EBIT
|
$209,100
|
$17,440
|
|
Interest expense
|
62,500
|
176,000
|
80,000 $422,640 169,056
|
|
EBT
|
$146,600
|
($158,560)
|
|
Taxes (40%)
|
58,640
|
-63,424
|
|
Net income
|
$87,960
|
($95,136)
|
$253,584
|
|
Other Data
|
2012
|
2013
|
2014
|
|
Stock price
|
$8.50
|
$6.00
|
$12.17
|
|
Shares outstanding
|
100,000
|
100,000
|
250,000
|
|
EPS
|
$0.88
|
(S0.95)
|
$1.104
|
|
DPS
|
$0.22
|
0.11
|
0.22
|
|
Tax rate
|
40%
|
40%
|
40%
|
|
Book value per share
|
$6.64
|
$5.58
|
$7.909
|
|
Lease payments
|
$40,000
|
$40,000
|
$40,000
|
|
Ratio Analysis
|
2012
|
2013
|
Industry
Average
|
|
Current
|
2.3
|
1.5
|
2.7
|
|
Quick
|
0.8
|
0.5
|
1.0
|
|
Inventory turnover
|
4
|
4
|
6.1
|
|
Days sales outstanding
|
37.3
|
39.6
|
32.0
|
|
Fixed assets turnover
|
10
|
6.2
|
7.0
|
|
Total assets turnover
|
2.3
|
2
|
2.5
|
|
Debt ratio
|
35.60%
|
59.60%
|
32.0%
|
|
Liabilities-to-assets ratio
|
54.80%
|
80.70%
|
50.0%
|
|
TIE
|
3.3
|
0.1
|
6.2
|
|
EBITDA coverage
|
2.6
|
0.8
|
8.0
|
|
Profit margin
|
2.60%
|
-1.6%
|
3.6%
|
|
Basic earning power
|
14.20%
|
0.60%
|
17.8%
|
|
ROA
|
6.00%
|
-3.3%
|
9.0%
|
|
ROE
|
13.30%
|
-17.1%
|
17.9%
|
|
Price/Earnings (P/E)
|
9.7
|
-6.3
|
16.2
|
|
Price/Cash flow
|
8
|
27.5
|
7.6
|
|
Market/Book
|
1.3
|
1.1
|
2.9
|
1. What is the free cash flow for 2014?
2. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
3. Calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2013?
4. Calculate the 2014 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
5. Calculate the 2014 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios. What can you conclude from these ratios?
6. Calculate the 2014 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
7. Calculate the 2014 price / earnings ratio, price / cash flow ratio, and market / book ratio
8. Use the extended DuPont equation to provide a summary and overview of company's financial condition as projected for 2014. What are the firm's major strengths and weaknesses?