Homework 16-12

(Zuzana Kuzmiakova Haberova)

1.
a) Working Capital= Total Current Assets-Total Current Liabilities

This Year:
1520000-800000= $720000
Last Year:
1090000-430000=$660000

b) Current Ratio= Current Assets

Current Liabilities
This Year:
1520000/800000=1.9
Last Year:
1090000/430000=2.54

c) Acid Test Ratio= Cash+Marketable Securities+Current Accounts Recievable+Short Term Notes

Recievable / Current Liabilities

This Year:
70000+0+480000+0/800000=0.69
Last Year:
150000+18000+300000+0/430000=1.09

d) Average Collection Period=365 Days

Accounts Receivable Turnover

Accounts Receivable Turnover= Sales (on Account )

Average Accounts Receivable

This Year:
5000000/ (480000+300000 / 2) = 12.82
365/18.82= 28.5 days
Last Year:
4350000/ (300000+250000 / 2)=15.81
365/15.81=23.1 days

e) Inventory Turnover= Cost of Goods Sold

Average Inventory (Balance)

Average Sales Period = 365 Days / Inventory Turnover

This Year:
3875000/ (950000+600000/2)= 5
365/184.5=73

Last Year:
3450000/ (600000+500000/2)= 6.27
365/6.27=58.2

f) Debt to Equity Ratio= Total Liabilities

Total Stockholders Equity
This Year:
1400000/1600000=0.875
Last Year:
1030000/1430000=0.72

g) Times Interest Earned Ratio= Earnings before Interest Expense and Income Taxes (or Net Operating
Income) / Interest Expense

This Year:
472000/72000=6.56
Last Year:
352000/72000=4.89

2. Common Size Format or Vertical Analyses of Financial Statements

SABIN ELECTRONICS
Comparative Balance Sheet
     
  This Year Last Year
Assets
Current assets:    
Cash 2.33 % 6.1%
Marketable securities 0% 0.7%
Accounts receivable, net 16% 12.2%
Inventory 31.7% 24.4%
Prepaid expenses 0.7% 0.9%
Total current assets 50.7% 44.3%
Plant and equipment, net 49.3% 55.7%
Total assets 100% 100%
     
Liabilities and Stockholders' Equity
Liabilities:    
Current liabilities 26.7% 17.5%
Bonds payable, 12% 20% 24.4%
Total liabilities 46.7% 41.9%
Stockholders' equity:    
Preferred stock, $25 par, 8% 8.3% 10.2%
Common stock, $10 par 16.7% 20.3%
Retained earnings 28.3% 27.6%
Total stockholders' equity 53.3% 58.1%
Total liabilities and stockholders' equity 100% 100%
     
SABIN ELECTRONICS
Comparative Income Statement
     
  This Year Last Year
Sales 100% 100%
Cost of goods sold 77.5% 79.3%
Gross margin 22.5% 20.7%
Selling and administrative expenses 13.1% 12.6%
Net operating income 9.4% 8.1%
Interest expense 1.4% 1.7%
Net income before taxes 8% 6.4%
Income taxes (40%) 2.4% 1.9%
Net income 5.6% 4.5%
3. Finacial Analyses and Loan Recommendation

Typical ratios:    
Current ratio 2,5 to 1
Acid-test ratio 1,3 to 1
Average collection period 18 days
Average sale period 60 days
Debt-to-equity ratio 0,90 to 1
Times interest earned ratio 6,0 times
Return on total assets 13%  
Price-earnings ratio 12  

The Current Ratio has declined this year as compared to the previous year and is below the industry average,
which is due to the fact that their current liabilities increased substantially. The Acid Test Ratio used to be
higher in a previous year, but has declined this year and now is below the industry average, which means that
the company would not be able to meet its short term obligations quickly without having to liquidate its
inventory. The typical Average Collection Period for the industry is shorter that the one for this company (for
last year, as well as for this year), which might mean that Sabin Electronics employs improper billing methods
or has too many old uncollectible accounts. But this ratio should be compared to company credit terms before
coming to a final conclusion (and I’m not sure what the sales terms provided in the textbook stand for).
Average Sales Period for Sabin Electronics used to be lower than the industry’s last year but has increased this
year, which is not desirable because it takes them longer to sell its inventory than it used to. That could be due
to the fact that they raised prices on old products. Debt to Equity Ratio is lower than industry average, which
is considered to be good for creditors. Times Interest Earned Ratio is very good, well about usually desired
number 2, as well as above the industry average, so their ability to generate income to cover their interest
payment is sufficient.

Even though some of the ratios seem to be deteriorating and seem worse than the company average, the
loan should be approved because the company has a very limited amount of financial debt, the ability of
the company to generate income appears to be more than sufficient to repay the loan considering its size
and the fact that 20% of it is going to be held in cash.