Cross-sectional ratio analysis

Cross-sectional ratio analysis

P5. Cross-sectional ratio analysis Use the financial statements that follow for Fox Manufacturing Company for the year ended December 31, 2009, along with the industry average ratios to:

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a. Prepare and interpret a complete ratio analysis of the firm’s 2009 operations.

b. Summarize your findings and make recommendations regarding: (1) liquidity; (2) activity; (3) debt; (4) profitability. Only two or three short sentences each, please!

Fox Manufacturing Company

Income Statement

For the year ended December 31, 2009

Sales revenue$ 600,000
Less: Cost of goods sold460,000
Gross profits$ 140,000
Less: Operating expenses
General admin. expenses$ 30,000
Depreciation expense30,000
Total operating expense60,000
Operating profits$ 80,000
Less: Interest expense10,000
Net profits before taxes$ 70,000
Less: Taxes27,100
Net profits after taxes (earnings available for stockholders)$ 42,900
Earnings per share (EPS)$ 2.15

Fox Manufacturing Company

Balance Sheet

December 31, 2009

Assets
Cash$ 15,000
Marketable securities7,200
Accounts receivable34,100
Inventories82,000
Total current assets$ 138,300
Net fixed assets$ 270,000
Total assets$ 408,300
Liabilities and Stockholders’ Equity
Accounts payable$ 57,000
Notes payable13,000
Accruals5,000
Total current liabilities$ 75,000
Long-term debt$ 150,000
Stockholders’ equity

Common stock equity (20,000 shrs outstanding)

$ 110,200
Retained earnings73,100
Total stockholders’ equity$ 183,300
Total liabilities and stockholder’s equity$ 408,300

(Note: Industry averages and “worksheet” on following page).

(Hint: You must calculate the following Actual 2009 ratios for Fox Mfg. (fill-in the blanks) and include in part a when you set up your table, and consider in part b).

RatioIndustry Average, 2009Actual 2009 for Fox Mfg. Company
Current ratio2.35
Quick ratio0.87
Inventory turnover*4.55
Average collection period*35.8 days
Total asset turnover1.09
Debt ratio0.300
Times interest earned ratio12.3
Gross profit margin0.202
Operating profit margin0.135
Net profit margin0.091
Return on total assets (ROA)0.099
Return on common equity (ROE)0.167
Earnings per share (EPS)$ 3.10

* Based on a 365-day year and on end-of-year figures.

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