Reading 35: Financial Analysis Techniques-LOS e 习题精选 2011, label, class

1215

Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 35: Financial Analysis Techniques

LOS e: Demonstrate how ratios are related and how to evaluate a company using a combination of different ratios.

 

 

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets	Year 2006	Year 2007
Cash	200	450
Accounts Receivable	600	660
Inventory	500	550
Total CA	1300	1660
Plant, prop. equip	1000	1580
Total Assets	2600	3240
Liabilities
Accounts Payable	500	550
Long term debt	700	1052
Total liabilities	1200	1602
Equity
Common Stock	400	538
Retained Earnings	1000	1100
Total Liabilities & Equity	2600	3240
Income Statement
Sales		3000
Cost of Goods Sold		(1000)
Gross Profit		2000
SG&A		500
Interest Expense		151
EBT		1349
Taxes (30%)		405
Net Income		944

Which of the following is closest to the company's return on equity (ROE)?

A) 0.29.

B) 1.83.

C) 0.62.

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There are several ways to approach this question but the easiest way is to recognize that ROE = NI / average equity thus ROE = 944 / 1,519 = 0.622.

If using the traditional DuPont, ROE = (NI / Sales) × (Sales / Assets) × (Assets / Equity):

ROE = (944 / 3,000) × (3,000 / 2,920) × (2,920 / 1,519) = 0.622

The 5-part Dupont formula gives the same result:

ROE = (net income / EBT)(EBT / EBIT)(EBIT / revenue)(revenue / total assets)(total assets / total equity)

Where EBIT = EBT + interest = 1,349 + 151 = 1,500

ROE 2007 = (944 / 1,349)(1,349 / 1,500)(1,500 / 3,000)(3,000 / 2,920)(2,920 / 1,519) = 0.622

1215

Income Statements for Royal, Inc. for the years ended December 31, 20X0 and December 31, 20X1 were as follows (in $ millions):

	20X0	20X1
Sales	78	82
Cost of Goods Sold	(47)	(48)
Gross Profit	31	34
Sales and Administration	(13)	(14)
Operating Profit (EBIT)	18	20
Interest Expense	(6)	(10)
Earnings Before Taxes	12	10
Income Taxes	(5)	(4)
Earnings after Taxes	7	6

Analysis of these statements for trends in operating profitability reveals that, with respect to Royal’s gross profit margin and net profit margin:

A) gross profit margin increased in 20X1 but net profit margin decreased.

B) gross profit margin decreased but net profit margin increased in 20X1.

C) both gross profit margin and net profit margin increased in 20X1.

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Royal’s gross profit margin (gross profit / sales) was higher in 20X1 (34 / 82 = 41.5%) than in 20X0 (31 / 78 = 39.7%), but net profit margin (earnings after taxes / sales) declined from 7 / 78 = 9.0% in 20X0 to 6 / 82 = 7.3% in 20X1.

1215

Selected financial information gathered from the Matador Corporation follows:

	2007	2006	2005
Average debt	$792,000	$800,000	$820,000
Average equity	$215,000	$294,000	$364,000
Return on assets	5.9%	6.6%	7.2%
Quick ratio	0.3	0.5	0.6
Sales	$1,650,000	$1,452,000	$1,304,000
Cost of goods sold	$1,345,000	$1,176,000	$1,043,000

Using only the data presented, which of the following statements is most correct?

A) Return on equity has improved.

B) Leverage has declined.

C) Gross profit margin has improved.

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Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007. Gross profit margin declined from 20.0% in 2005 to 18.5% in 2007. Return on equity has improved since 2005. One measure of ROE is ROA × financial leverage. Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA × (1 + 2.25 debt-to-equity)]. In 2007, ROE was 27.6% [5.9% ROA × (1 + 3.68 debt-to-equity)].

1215

Assume that Q-Tell Incorporated is in the communications industry, which has an average receivables turnover ratio of 16 times. If the Q-Tell’s receivables turnover is less than that of the industry, Q-Tell’s average receivables collection period is most likely:

A) 20 days.

B) 12 days.

C) 25 days.

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Average receivables collection period = 365 / receivables turnover, which is 22.81 days for the industry (= 365 / 16). If Q-Tell’s receivables turnover is less than 16, its average days collection period must be greater that 22.81 days.

1215

Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions):

	E Company	G Company
Sales	70	90
Cost of Goods Sold	(30)	(40)
Gross Profit	40	50
Sales and Administration	(5)	(15)
Depreciation	(5)	(10)
Operating Profit	30	25
Interest Expense	(20)	(5)
Earnings Before Taxes	10	20
Income Taxes	(4)	(8)
Earnings after Taxes	6	12

The financial risk of E Company, as measured by the interest coverage ratio, is:

A) higher than G Company's because its interest coverage ratio is less than one-third of G Company's.

B) higher than G Company's because its interest coverage ratio is less than G Company's, but at least one-third of G Company's.

C) lower than G Company's because its interest coverage ratio is at least three times G Company's.

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E Company’s interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5.

G Company’s interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G Company.