# Weekly Management meeting in Accounting: Sue Sims (controller): re...

## 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: Liz ClarkK atrina awam 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

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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....

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