Your assignment is to prepare and submit a paper on ratio analysis situation. Ratio Analysis Case Section One Return on Total Asset (ROTA) can be calculated as. ROTA = Earnings before interest and tax/total net assets (Siddiqui, 623)
Net Assets = total assets – liabilities
Net assets = 3,000, 000 + 2,400, 000 – 1,600, 000 = 3,800, 000
Earnings before interest and tax = 340, 000
ROTA = 340, 000/ 3,800,000 = 0.0895
Return on common stockholders’ equity = Net income divided by average common stockholders’ equity.
Net income = 182, 000
Average common stockholders’ equity = (1,400, 000 + 1,272, 000) / 2 = 1,336, 000
Return on common stockholders’ equity = 182, 000 / 1,336, 000 = 0.136
The company’s financial leverage is negative because the return on common stockholders’ equity is greater than return on total assets.
Earning per share is calculated as Net income divided by number of common shares outstanding.
Net income = 182, 000
Number of common shares outstanding = 800, 000/40 = 20, 000
Earning per share = 182, 000 / 20, 000
Dividend payout ratio for common stock = cash dividends / net income
=30,000 / 182,000 = 0.165
Dividend yield ratio for common stock is calculated as the annual dividends per share of common stock divided by the market price of common stock per share (Siddiqui, 623).
Annual dividends per share = 30,000 / 800,000 = 0.0375
Market price of common stock = $ 60.
Hence, dividend yield ratio for common stock would be 0.0375 / 60 = 0.000625.
Price earning ratio = market price of common stock per share dividend by earnings per share (Siddiqui, 623).
Therefore, price earning ratio would be equal to 60 / 9.1 = 6.59. Investors regard Stephens Company as a good investment company in the industry since the investors can earn well from their investment in shares. Although the price earning ratio of the company is below that of the industry, investors in the company will still earn, but below the industry’s earning.
Book value per share of common stock = book value of equity for common shares divided by number of common shares.
Book value for common shares = (3,000,000 – 1,600,000 – 300,000) = 1,100, 000
Book value of equity per common share = 1100, 000 / 20, 000 = $55.
The market value of the common shares is $60 while the book value is $55. The company’s stock is not undervalued since the stock is selling at a higher value than the book value.
Gross margin percentage = gross profit / net sales (Siddiqui, 623)
Gross profit = 770,000
Net sales = 2,850,000
Gross profit margin = 770,000 / 2,850,000 = 0.27 * 100 = 27%
Current ratio = current assets / current liabilities (Siddiqui, 623).
=1,120,000 / 600,000 = 1.87
Acid-test ratio = quick assets / current liabilities
Quick assets = (1,120,000 – 610,000) = 510,000
Therefore, acid-test ratio = 510,000 / 600,000 = 0.85
Average collection period = 365/ receivables turnover
Receivable turnover = 2,850,000 / 550,000 = 5.18. Therefore, average collection period would be 365 / 5.18 = 70.4, which is equivalent to 71 days.
Average sale period = (inventory * 365) / cost of sales = (590,000 + 610,000) * 365 / 2,080,000
= 1210,000 * 365 / 2080,000 = 212.3, which is approximately 213 days.
Debt to equity ratio = total liabilities divided by total stockholders’ equity. Therefore, debt to equity ratio would be equal to 1,600,000 / 1,400,000 = 1.143.
Times interest earned = EBIT divided by interest charges (Siddiqui, 623). Hence, times interest earned would be equal to 340,000 / 80,000 = 4.25.
From the ratio analysis, the company’s loan application for $ 500,000 should be approved since the company would be capable of meeting its liability. This is from the analysis of the acid-test ratio and the current ratio. The company is capable of repaying the loan within the duration of five years.
Siddiqui, A. Managerial Economics and Financial Analysis. New Delhi: New Age International Publishers, 2006. Print.
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