Financial statements

Financial Management FINC610 Spring 2018 First Assignment Due: February 24th 1) Choose a public limited company preferably from UAE that regularly publishes its annual reports that contains the three financial statements that we have learnt in this course. Take two reports (3 to 5 year apart) and see how its position has changed over the years. Compute as many financial ratios as you can to do your analysis. Alternatively, you can choose two companies for the same year and compare their relative strength and weaknesses by looking at their financial ratios. Please attach the financial statements with your analysis. 2. Given the financial statements for Jones Corporation and Smith Corporation shown here: a. To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all ratios before answering. b. In which one would you buy stock? Why? JONES CORPORATION Current Assets Liabilities Cash $ 20,000 Accounts payable $100,000 Accounts receivable 80,000 Bonds payable (long-term) 80,000 Inventory 50,000 Long-Term Assets Stockholders’ Equity Fixed assets $500,000 Common stock $150,000 Less: Accumulated depreciation (150,000) Paid-in capital 70,000 Net fixed assets* 350,000 Retained earnings 100,000 Total assets $500,000 Total liab. and equity $500,000 Sales (on credit) $1,250,000 Cost of goods sold 750,000 Gross profit 500,000 Selling and administrative expense† 257,000 Less: Depreciation expense 50,000 Operating profit 193,000 Interest expense 8,000 Earnings before taxes 185,000 Tax expense 92,500 Net income $ 92,500 *Use net fixed assets in computing fixed asset turnover. †Includes $7,000 in lease payments. SMITH CORPORATION Current Assets Liabilities Cash $ 35,000 Accounts payable $ 75,000 Marketable securities 7,500 Bonds payable (long-term) 210,000 Accounts receivable 70,000 Inventory 75,000 Long-Term Assets Stockholders’ Equity Fixed assets $500,000 Common stock $ 75,000 Less: Accum. dep. (250,000) Paid-in capital 30,000 Net fixed assets* 250,000 Retained earnings 47,500 Total assets $437,500 Total liab. and equity $437,500 *Use net fixed assets in computing fixed asset turnover. SMITH CORPORATION Sales (on credit) $1,000,000 Cost of goods sold 600,000 Gross profit 400,000 Selling and administrative expense† 224,000 Less: Depreciation expense 50,000 Operating profit 126,000 Interest expense 21,000 Earnings before taxes 105,000 Tax expense 52,500 Net income $ 52,500 †Includes $7,000 in lease payments. 3) Lamar Swimwear (trend analysis and industry comparisons) Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to point out the increase in sales that has taken place over the last three years as indicated in the income statement, Exhibit 1. The annual growth rate is 25 percent. A balance sheet for a similar time period is shown in Exhibit 2, and selected industry ratios are presented in Exhibit 3. Note the industry growth rate in sales is only 10 to 12 percent per year. There was a steady real growth of 3 to 4 percent in gross domestic product during the period under study. Comprehensive Problem 1 (Continued) Exhibit 1 LAMAR SWIMWEAR Income Sheet 20X1 20X2 20X3 Sales (all on credit) $1,200,000 $1,500,000 $1,875,000 Cost of goods sold 800,000 1,040,000 1,310,000 Gross profit $ 400,000 $ 460,000 $ 565,000 Selling and administrative expense* 239,900 274,000 304,700 Operating profit (EBIT) $ 160,100 $ 186,000 $ 260,300 Interest expense 35,000 45,000 85,000 Net income before taxes $ 125,100 $ 141,000 $ 175,300 Taxes 36,900 49,200 55,600 Net income $ 88,200 $ 91,800 $ 119,700 Shares 30,000 30,000 38,000 Earnings per share $ 2.94 $ 3.06 $ 3.15 *Includes $15,000 in lease payments for each year. Exhibit 2 LAMAR SWIMWEAR Balance Sheet Assets 20X1 20X2 20X3 Cash $ 30,000 $ 40,000 $ 30,000 Marketable securities 20,000 25,000 30,000 Accounts receivable 170,000 259,000 360,000 Inventory 230,000 261,000 290,000 Total current assets $ 450,000 $ 585,000 $ 710,000 Net plant and equipment 650,000 765,000 1,390,000 Total assets $1,100,000 $1,350,000 $ 2,100,000 Liabilities and Stockholders’ Equity Accounts payable $ 200,000 $ 310,000 $ 505,000 Accrued expenses 20,400 30,000 35,000 Total current liabilities $ 220,400 $ 340,000 $ 540,000 Long-term liabilities 325,000 363,600 703,900 Total liabilities $ 545,400 $ 703,600 $ 1,243,900 Common stock ($2 par) 60,000 60,000 76,000 Capital paid in excess of par 190,000 190,000 264,000 Retained earnings 304,600 396,400 516,100 Total stockholders’ equity $ 554,600 $ 646,400 $ 856,100 Total liabilities and stockholders’ equity $1,100,000 $1,350,000 $2, 100,000 Exhibit 3 Selected Industry Ratios 20X1 20X2 20X3 Growth in sales — 10.00% 12.00% Profit margin 7.71% 7.82% 7.96% Return on assets (investment) 7.94% 8.86% 8.95% Return on equity 14.31% 15.26% 16.01% Receivable turnover 9.02x 8.86x 9.31x Average collection period 39.9 days 40.6 days 38.7 days Inventory turnover 4.24x 5.10x 5.11x Fixed asset turnover 1.60x 1.64x 1.75x Total asset turnover 1.05x 1.10x 1.12x Current ratio 1.96x 2.25x 2.40x Quick ratio 1.37x 1.41x 1.38x Debt to total assets 43.47% 43.11% 44.10% Times interest earned 6.50x 5.99x 6.61x Fixed charge coverage 4.70x 4.69x 4.73x Growth in EPS — 10.10% 13.30% The stock in the corporation has become available due to the ill health of a current stockholder, who is in need of cash. The issue here is not to determine the exact price for the stock, but rather whether Lamar Swimwear represents an attractive investment situation. Although Mr. Adkins has a primary interest in the profitability ratios, he will take a close look at all the ratios. He has no fast and firm rules about required return on investment, but rather wishes to analyze the overall condition of the firm. The firm does not currently pay a cash dividend, and return to the investor must come from selling the stock in the future. After doing a thorough analysis (including ratios for each year and comparisons to the industry), what comments and recommendations do you offer to Mr. Adkins?