Final financial ratio analysis assignment

  

This term you have learned to understand a company’s financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the company’s financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations. 

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan. 

The bank will base its decision on the following averages for the DME industry:

  

Ratio

Industry Average

 

Current   ratio

1.50

 

Quick   ratio

0.80

 

Receivables   turnover ratio

18.0

 

Inventory   turnover ratio

20.0

 

Debt   to assets ratio

0.56

 

Profit   margin

10.25%

The balance sheet data for Dependable DME Company follows:

  

December 31, 2017

December 31, 2016

 

Cash

$75,000

$60,000

 

Accounts   receivable

40,000

20,000

 

Inventory

30,000

20,000

 

Prepaid   insurance

5,000

5,000

 

Total current assets

140,000

105,000

 

Property   and equipment

600,000

550,000

 

Accumulated   depreciation

140,000

110,000

 

Total property and equipment

460,000

440,000

 

Total assets

$600,000

$545,000

 

Accounts   payable

$60,000

$60,000

 

Other   current liabilities

40,000

45,000

 

Total current liabilities

100,000

105,000

 

Bonds   payable

150,000

150,000

 

Total liabilities

250,000

255,000

 

Common   stock

250,000

250,000

 

Retained   earnings

100,000

40,000

 

Total stockholders’ equity

350,000

290,000

 

Total liabilities and stockholders’   equity

$600,000

$545,000

The income statement data for Dependable DME Company follows:

  

Sales

$600,000

 

Cost   of goods sold

350,000

 

Gross profit

$250,000

 

Operating   expenses

100,000

 

Operating income

$150,000

 

Interest   expense

25,000

 

Income before taxes

$125,000

 

Income   tax expense

65,000

 

Net   income

$60,000

Required: 

  1. Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables      Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets      Ratio. Be sure to show the actual calculation as well as your final      answer. 

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

  1. Below each ratio, comment on the interpretation of      the ratio. In other words, what does the result tell you, specifically? (8      points)
  2. Based upon the industry averages upon which the bank      relies, should they approve the loan to Mr. Smith? Why or why not? (7      points)
  3. In one-half page, comment on what financial aspect      of Dependable DME Company looks good and where can Mr. Smith make some      improvements. Specifically identify at least two recommendations to Mr.      Smith that can be made to improve the financial position of his business.      (8 points)

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