Ratio Analysis for Land of Lincoln Equipment, Inc.

in partial fulfillment of the requirements for the course MGT452 - Finance

Submitted to: Juan Carlos O. Medina

Submitted by:
Mark Lyndon de Ramos
Andrea Felix
Anna Louise Lacson
Janice April Mercurio
Angela Perillo

Submitted: May 23, 2018

 LAND OF LINCOLN EQUIPMENT, INC.
Years ended December 31, 2008 and 2007

Income Statement Data Balance Sheet Data

2008 2007 2008 2007
Net Sales $ 1,400,000 $ 1,100,000 Assets
Cost of Goods Sold 760,000 600,000 Cash $ 50,000 $ 40,000
Gross Profit on Sales $ 640,000 $ 500,000 Accounts Receivable (net) 300,000 320,000
Selling, General, and Other Expenses 340,000 280,000 Inventory 380,000 420,000
Income before Taxes $ 300,000 $ 220,000 Prepaid Expenses 30,000 10,000
Income Taxes 120,000 89,000 Land, Buildings, and Equipment (net) 760,000 600,000
Net Income $ 180,000 $ 131,000 Intangible Assets 110,000 100,000
Dividends Paid 155,000 150,000 Other Assets 70,000 10,000
Net increase (decrease) in retained earnings $ 25,000 $ (19,000) $ 1,700,000 $ 1,500,000
Liabilities and Stockholders' Equity
Additional Information: Accounts Payable $ 120,000 $ 185,000
1. Bonds payable are the only interest-bearing liability. Wages, Interest, and Dividends Payable 25,000 25,000
2. Year-end price per share of the company's stock was $35 for 2008 and $25 Income Tax Payable 29,000 5,000
for 2007. Miscellaneous Current Liabilities 10,000 4,000
3. Cash flow from operations amounted to $261,000 in 2008 and $15,000 in 8% Bonds Payable 300,000 300,000
2007. Deferred Revenues (Long-term) 10,000 10,000
4. Depreciation for the year amounted to $76,000 in 2008 and $60,000 in No-par Common Stock $10 stated value 500,000 400,000
2007. Additional Paid-in Capital 510,000 400,000
Retained Earnings 196,000 171,000
$ 1,700,000 $ 1,500,000
Overall Performance Measures
2008 2007
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 35 25
𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 = = 9.72 𝑡𝑖𝑚𝑒𝑠 = 7.36 𝑡𝑖𝑚𝑒𝑠
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 3.60 3.28

Analysis:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) 180,000 131,000

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡𝑠 = = 10.59% = 8.73%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 1,700,000 1,500,000
Analysis: This financial ratio shows the percentage of profit a company earns in relation to its overall resources. The total assets of the
company are earning 10.59% of net income for each dollar of total asset invested in 2008. The company's ROA increased by 1.85% from 2007
to 2008.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒) 180,000 131,000
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = = 11.87% = 10.23%
𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,516,000 1,281,000

Analysis: Return on invested capital measures how well a company turns the capital invested in the company into profits. With this company,
in the year 2007, 10.23% of the investment were turned into profit. After a year, the company was able to increase it to 11.87%.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 180,000 131,000

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 = = 14.93% = 13.49%
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,206,000 971,000
Analysis: The return on shareholder’s equity measures the rate of return earned on the stockholder’s equity investment in the firm. Year 2008
has a higher return on equity with 14.93% compared to the 13.49% for year 2007. With this, it can be concluded that during the year 2008, the
firm’s stockholders received a greater return since it has a greater percentage.

Profitability Measures
2008 2007

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 640,000 500,000

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 % = = 45.71% = 45.45%
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000
 Analysis: Gross Margin represents the ratio of gross margin expressed as percentage of sales. After paying off the cost of goods sold, the ratio
of the company shows how it is efficiently use its resources in producing sales revenues. Gross profit margin increased by 0.26% from 45.45%
in 2007 and 45.71% in 2008.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 180,000 131,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = = 12.86% = 11.91%
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000

Analysis:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 180,000 131,000

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = = $3.60 = $3.28
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠 50,000 40,000

Analysis: Earnings per share measures how much a company earns in every one dollar. Land Lincoln Equipment Inc. earns one dollar for every
one dollar invested on their company. In other words, the company was able to triple the money invested in them.

Tests of Investment Utilization

2008 2007

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000

𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = 0.82 𝑡𝑖𝑚𝑒𝑠 = 0.73 𝑡𝑖𝑚𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 1,700,000 1,500,000

Analysis: The asset turnover ratio measures how efficient a company uses its assets to generate sales revenue or sales income for the company.
The company is earning 0.82 times for every dollar of assets invested. In comparison with 2007, the asset turnover increased by 0.09.

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000

𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = 0.92 𝑡𝑖𝑚𝑒𝑠 = 0.86 𝑡𝑖𝑚𝑒𝑠
𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,516,000 1,281,000

Analysis: Invested capital is the total amount of money raised by a company by issuing securities to shareholders and bondholders. With year
2007 having a lower capital turnover compared to 2008, it means that 2007 corresponds to a higher profit margin.

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000

𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = 1.16 𝑡𝑖𝑚𝑒𝑠 = 1.13 𝑡𝑖𝑚𝑒𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,206,000 971,000
Analysis: Commented [DRMLD1]:

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = = 1.67 𝑡𝑖𝑚𝑒𝑠 = 1.67 𝑡𝑖𝑚𝑒𝑠
𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑃𝑙𝑎𝑛𝑡, 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 836,000 660,000

Analysis: Capital intensity ratio measures the company’s amount of capital needed per dollar of sales revenues. The company seems to be
using its assets more efficiently. It’s efficient use of its resources resulted to a consistent capital intensity ratio from 2007 to 2008.

𝐶𝑎𝑠ℎ 50,000 40,000

𝐷𝑎𝑦𝑠 ′ 𝐶𝑎𝑠ℎ = = 17.40 𝑑𝑎𝑦𝑠 = 16.15 𝑑𝑎𝑦𝑠
𝐶𝑎𝑠ℎ 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 ÷ 365 2,873.97 2,476.71

Analysis:

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 300,000 320,000

𝐷𝑎𝑦𝑠 ′ 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑) = = 78.21 𝑑𝑎𝑦𝑠 = 106.18 𝑑𝑎𝑦𝑠
𝑆𝑎𝑙𝑒𝑠 ÷ 365 3,835.62 3,013.70

Analysis: The average collection period in 2008 is 78.21 days compared to 106.18 days in 2007. Collection in receivables is more efficient in
2008. Commented [DRMLD2]: For revision

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 380,000 420,000

𝐷𝑎𝑦𝑠 ′ 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = = 𝑑𝑎𝑦𝑠 = 182.5 𝑑𝑎𝑦𝑠 = 255.5 𝑑𝑎𝑦𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 ÷ 365 2,082.19 1,643.84
Analysis: The days’ inventory turnover is an indicator of the size of the firm’s investment in inventory. Year 2007 has a higher turnover with
255.5 days compared to the 182.5 days for year 2008. This means that year 2007 has a lower investment in inventory and the more liquid is the
investment.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 760,000 600,000
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = 𝑡𝑖𝑚𝑒𝑠 = 2.00 𝑡𝑖𝑚𝑒𝑠 = 1.43 𝑡𝑖𝑚𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 380,000 420,000
Analysis: Inventory turnover shows how fast the company can turn its inventory into profit. In the previous year, the inventory turns 1.43 times
and is in the company’s hands for almost 255 days. After a year of operation, the company was able to turn the inventory two times and is in
the hands of the company for 182.5 days.
 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 1,400,000 1,100,000
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = 2.43 𝑡𝑖𝑚𝑒𝑠 = 1.93 𝑡𝑖𝑚𝑒𝑠
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 576,000 571,000

Analysis: The working capital turnover ratio indicates a company's effectiveness in using its working capital to generate sales revenues.
Accordingly, the company has increased its working capital turnover by 0.5 from 1.93 times in 2007 to 2.43 time in 2008.

Tests of Financial Condition

2008 2007

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 760,000 790,000

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = = 4.13: 1 = 3.61: 1
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 184,000 219,000

Analysis:

𝑀𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 350,000 360,000

𝐴𝑐𝑖𝑑 − 𝑡𝑒𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 = = 1.90: 1 = 1.64: 1
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 184,000 219,000

Analysis: Based on the Acid Test Quick Ratio, the company is more liquid in the year 2008. However, it is a slightly less liquid in 2007. Reason
could be is that the income picks up in 2008. Commented [DRMLD3]: For revision

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 494,000 529,000

𝐷𝑒𝑏𝑡/𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = = 40.96% = 54.48%
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,206,000 971,000
Analysis: The debt ratio measures the percentage of the firm’s assets that were financed using current plus long-term liabilities. With this, the
company during the year 2007 has greater reliance on non-owner financing or financial leverage since it has a higher ratio compared to year
2008.
𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 310,000 310,000
𝐷𝑒𝑏𝑡/𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = = 20.45% = 24.20%
𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 1,516,000 1,281,000
Analysis: Debt to capitalization ratio measures the total amount of outstanding debt as a percentage of the firm’s total capitalization. With Land
Lincoln Equipment Inc., in the year 2007, 24.20% of the company’s structure is debt. In the year 2008, it decreased to 20.45%.

𝑃𝑟𝑒𝑡𝑎𝑥 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 324,000 244,000

𝑇𝑖𝑚𝑒𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 = = 13.50 𝑡𝑖𝑚𝑒𝑠 = 10.17 𝑡𝑖𝑚𝑒𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 24,000 24,000

Analysis:

𝐶𝑎𝑠ℎ 𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑒𝑑 𝑏𝑦 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 261,000 15,000

𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤/𝐷𝑒𝑏𝑡 = = 52.83% = 2.84%
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 494,000 529,000
Analysis: Based on the Cash flow/Debt Ratio in 2008, the company's cash flow has more than half of the company's debt. And debt can be
paid in less than 2 years assuming all is well in the next year. While in 2007, it's cash flow can only pay 2% of it's debt, meaning the company
incurred a loss but it overturned dramatically the following year. Commented [DRMLD4]: For revision

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 3.10 3.75

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑌𝑖𝑒𝑙𝑑 = = 8.86% = 15%
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 35.00 25.00

Analysis: Dividend yield indicates how much a company pays out in dividends each year relative to its share price. Year 2007 can be considered
to be the better year since it has a higher percentage compared to year 2008 and a higher percentage means that it had a better performance
and it was less risky.

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 155,000 150,000

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 = =% = 86.11% = 114.50%
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 180,000 131,000

Analysis: Dividend payout ratio is measures the amount of dividends paid to its shareholders compare to the net income of the company. In
the year 2007, the company’s dividend payout ratio is more than 100%. This meant that the company gave out more money than it earned in
that year. This is probably the reason why in the following year, the company lowered its dividend payout to 86.11%.