Transcribed Text
Weekly Management meeting in Accounting:
Sue Sims (controller): really need you to analyze Winco Construction Company and see if
we should extend them credit for this project we are deciding upon. want you to analyze
their financial statements and review their financial ratios (liquidity, solvency, efficiency,
profitability and market ratios). We really need to insure that this customer is worthy of
credit and can pay for our services.
Scenario Steps to Completion
1. You are to analyze various aspects of customer firm and our firm; Stirm Windows Inc.
and to perform various financial analysis tasks associated with the customer firm Winco
Const. to ensure their financial strength (Health is sufficient to justify several large orders
received from the firm and an investment in the firm itself. what ratio will answer this?
Some basic statistics are needed to assess the firm's financial health, given the amount of
business the two firms transact.
Calculate the appropriate ratios which should include the Dupont ratio among others.
Place the numbers into the following context of questions that Sue wants answered:
Are these ratios sufficient enough for you to evaluate our customer?
What do you conclude about the firm's financial health and any change from 2013 to 2014?
Is this a firm we would feel comfortable extending significant credit to in the future?
We are also looking to take minority ownership position in Winco Const. and need a
profitability analysis. Use the decomposed Dupont model to analyze the drivers (return on
assets, profit margin, debt/leve rage) of Winco's return on equity (ROE) for 2014. What can
you conclude about the drivers of Winco's ROE?
Concept Check: Ratios are simply the relationship between two variables. Keep in mind
where the numbers are coming from in the financial statements and think about how these
variables relate to one another and what the result shows in general before we look at the
specific company.
Helpful Hint: When calculating financial ratios you need to place them in context of either;
a competitor, previous year's results or to industry benchmarks. A single ratio merely
shows relationship between two variables.
The financial statements are provided below:
Winco Construction Inc.
2014 Income Statement
($ millions)
Net sales
$8,450
Less: Cost of goods sold
7,240
Less: Depreciation
400
Earnings before interest and taxes
810
Less: Interest paid
70
Taxable Income
$ 740
Less: Taxes
259
Net income
481
Winco Construction Inc..
2013 and 2014 Balance Sheets
($ in millions)
2013
2014
2013 2014
Cash
$ 120 140
Accounts payable
$1,110 $1,120
Accounts rec.
930
780
Long-term debt
840
1,210
Inventory
1,480 1,520
Common stock
3,200
3,000
Total
$2,530 $2,440
Retained earnings 530
710
Net fixed assets
3,150 3,600
Total assets
$5,680 $6,040
Total liabilities & equ
$5,680
$6,040
Average Industry Ratios
Lower Quartile
Median
Upper
Quartile
Day's sales in receivables
60
40
30
Cash Coverage ratio
2.0
10.0
18.0
Debt ratio
1.00
.90
0.80
Return on Equity
13
14.0
15.0
Here are some suggested Financial Ratio to apply from the group:
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Profit Margin (PM)
x
x
x
Total Asset Turnover (TAT)
x
x
x
Equity Multiplier (EM)
x
x
Sustainable Growth Rate
x
Operating-profit-margin
x
Return on Assets
x
x
x
Cash flow ratio
x
Quick Ratio
x
x
x
Working Capital
x
Accounts Receivable turnover
x
x
x
Day's sales in receivables
x
Cash Coverage ratio
x
Debtratio
x
x
EBIDTA ratio
x
Times Interest Earned Ratio
x
Return c Capital Employed
Current Ratio
x
Inventory Tumover
Debt equity
Return Equity
Equity Ratio
Days Sales in Inventory
Gross Margin
Return o Capital Employed
Price Earnings Ratio
Market Book
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.
Liquidity Ratio
Current ratio measures the ability of the company to pay its short term liabilities. A current ratio of 2 is considered good. The current ratio of the company is 2.18 which consider well because above 2.
Working capital is a measure of liquidity and overall health of the company. The working capital of the company stood at $1,320 which is indicator of good health of the company.
Quick Ratio measures the company ability to pay its current liabilities only with its quick assets. The ideal acid test ratio is 1, the quick ratio 0.82 which shows the inefficiency of the company to pay off its current liabilities in a short span of time.
Inventory Turnover ratio measures how effectively and efficiently the company has managed its inventory. It shows how many times the company has turned its inventory. The ratio for company is good for and is showing an increasing trend....