Using Ratios to Compare Loan Requests from Two Companies
The financial statements for Thor and Gunnar companies are summarized here:
Thor Company | Gunnar Company | |
Balance Sheet | ||
Cash | $ 35,000 | $ 32,000 |
77,000 | 28,000 | |
Inventory | 154,000 | 30,000 |
Equipment, Net | 770,000 | 192,000 |
Other Assets | 196,000 | 68,400 |
Total Assets | $1,232,000 | $350,400 |
Current Liabilities | $ 168,000 | $ 18,000 |
Note Payable (long-term) (12% interest rate) | 266,000 | 66,000 |
Common 5tock (par $20) | 672,000 | 252,000 |
Additional Paid-in Capital | 70,000 | 4,800 |
56,000 | 9,600 | |
Total Liabilities and Stockholders’ Equity | $1,232,000 | $350,400 |
Income Statement | ||
Sales Revenue | $1,120,000 | $336,000 |
Cost of Goods Sold | 672,000 | 180,000 |
Other Expenses | 336,000 | 114,000 |
Net Income | $ 112,000 | $ 42,000 |
Other Data | ||
Per share price at end of year | $ 13.20 | $ 19.60 |
Selected Data from Previous Year | ||
Accounts Receivable, Net | $ 65,800 | $ 27,200 |
Inventory | 133,000 | 45,600 |
Equipment, Net | 770,000 | 192,000 |
Note Payable (long-term) (12% interest rate) | 266,000 | 66,000 |
Total Stockholders’ Equity | 798,000 | 266,400 |
These two companies are in the same business and state but different cities. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Thor Company wants to borrow $105.000 and Gunnar Company is asking for $36,000. The loans will be for a two-year period. Neither company issued stock in the current year. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.
Required:
- 1. Calculate the ratios in Exhibit 13.5 for which sufficient information is available. Round all calculations to two decimal places.
- 2. Assume that you work in the loan department of a local bank. You have been asked to analyze the situation and recommend which loan is preferable. Based on the data given, your analysis prepared in requirement 1, and any other information, give your choice and the supporting explanation.
1.
Explanation of Solution
Net Profit margin Ratio:
This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Following is the calculation of Net profit margin ratio for Company T
Following is the calculation of Net profit margin ratio for Company G
Thus, the net profit margin ratio for Company T and Company G is 10.00% and 12.50% respectively.
Explanation of Solution
Gross Profit Percentage:
Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.
Following is the calculation of Gross profit percentage ratio for Company T
Following is the calculation of Gross profit percentage ratio for Company G
Thus, the gross profit percentage ratio for Company T and Company G is 40.00% and 46.43%
Explanation of Solution
Fixed Asset turnover:
Fixed asset turnover is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.
Following is the fixed asset turnover ratio for Company T
Following is the fixed asset turnover ratio for Company G
Thus, the fixed asset turnover ratio for company R and company C is 1.45 and 1.75.
Explanation of Solution
Return on equity ratio:
Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.
Following is the return on equity ratio for the Company T
Working note:
Calculate the average stockholders’ equity
Following is the return on equity ratio for the Company G
Working note:
Thus, the return on equity ratio for Company T and Company G is 14.04% and 15.77%
Explanation of Solution
Earnings per share ratio:
Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.
Following is the Earnings per share ratio of Company T
Working note:
Calculate the number of shares outstanding for company T
Following is the Earnings per share ratio of Company G
Working note:
Calculate the number of shares outstanding for Company G
Thus, the Earnings per share ratio of Company T and Company G is $3.33 and $3.33
Explanation of Solution
Price/Earnings Ratio:
The price/earnings ratio shows the market value of the amount invested to earn $1 by a company. It is major tool to be used by investors before the decisions related to investments in a company.
Following is the price/earnings ratio of Company T
Following is the price/earnings ratio of Company G
Thus, the price/earnings ratio of Company T and Company G is 3.96 and 5.89
Explanation of Solution
Receivables turnover ratio:
Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return.
Following is the receivables turnover ratio for Company T
Following is the number of days a company T takes to collect accounts receivables.
Working note:
Calculate the average net receivables
Following is the receivables turnover ratio for Company G
Following is the number of days a company G takes to collect accounts receivables.
Working note:
Calculate the average net receivables
Thus, the receivables turnover ratio for company T and company G is 15.69 and 12.17
Explanation of Solution
Inventory Turnover Ratio:
This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.
Following is the inventory turnover ratio for Company T
Following is the number of days a company T takes to sell its inventory
Working note:
Calculate the average inventory
Following is the inventory turnover ratio for Company G
Following is the number of days a company G takes to sell its inventory
Working note:
Calculate the average inventory
Thus, the inventory turnover ratio for company T and company G is 4.68 and 4.76
Explanation of Solution
Current ratio:
Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.
Following is the current ratio of Company T
Working note:
Calculate the current assets of Company T
Following is the current ratio of Company G
Working note:
Calculate the current assets of Company G
Thus, the current ratio of Company T and Company G is 1.58 and 5.00
Explanation of Solution
Debt to Asset Ratio:
Debt to asset ratio is the ratio between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.
Following is the debt-to-asset ratio of Company T
Following is the debt-to-asset ratio of Company G
Thus, the debt-to-asset ratio of Company T and Company G is 0.35 and 0.24.
2.
To State: which company is preferable for receive loan.
Explanation of Solution
Following is the comparison of the Company T and G profitability and liquidity which helps in deciding which company is preferable to receive loan:
Particulars | Company T | Company G |
Profitability: | ||
Net profit margin ratio | 10% | 12.50% |
Gross profit percentage ratio | 40.00% | 46.43% |
Fixed asset turnover ratio | 1.45 | 1.75 |
Earnings per share | $3.33 | $3.33 |
Return on equity | 14.04% | 15.77% |
Liquidity: | ||
Inventory Turnover | 4.68 | 4.76 |
Current ratio | 1.58 | 5.00 |
Table (1)
From the above table it is concluded that Company G is more preferable than Company T as its profitability and liquidity ratios are higher.
Company G is preferable to receive loan from loan bank because by analysing there profitability and liquidity and solvency of both the Companies T and G though Company G solvency position is less risky its profitability and liquidity is comparatively higher than Company T, even while comparing the on the basis of loan requirement Company C needs $36,000 which is lesser to Company T $105,000 so it is advisable to provide loan for Company G.
Want to see more full solutions like this?
Chapter 13 Solutions
Fundamentals Of Financial Accounting
- FINANCIAL RATIOS Based on the financial statements for Jackson Enterprises (income statement, statement of owners equity, and balance sheet) shown on pages 596597, prepare the following financial ratios. All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was 21,600. 1. Working capital 2. Current ratio 3. Quick ratio 4. Return on owners equity 5. Accounts receivable turnover and average number of days required to collect receivables 6. Inventory turnover and average number of days required to sell inventoryarrow_forwardBased upon the information given below, calculate the following: Current ratio Acid test Accounts receivable turnover ratio Cash ratio Inventory turnover EPS Total asset turnover Debt ratio Debt-to-equity ratio Times interest earned ROI Net profit margin ROE Market price/Book value P/E BALANCE SHEET ASSETS LIABILITIES & STOCKHOLDERS EQUITY Cash $ 1,500 Accounts payable $12,500 Marketable securities 2,500 Notes payable 12,500 Accounts receivable 15,000 Total current liabilities…arrow_forwardUse the financial ratios of company A and company B to answer the questions below. Company A Company B Yr t+1 Year t Yr t+1 Year t Current ratio 0.55 0.59 0.56 0.55 Accounts receivable turnover 6.22 6.25 5.06 4.87 Debt to total assets 40.5% 40% 67.8% 65.9% Times interest earned 8.80 30.6 5.97 6.33 Free cash flows (in millions) ($3,819) $3,173 $168 $550 Return on stockholders’equity 7.7% 7.7% 26.6% 23.3% Return on assets 4.3% 4.3% 8.9% 7.9% Profit margin…arrow_forward
- Consider the following financial data for Terry Enterprises: Balance Sheet as of December 31, 2018 Cash $ 86,000 Accounts payable $ 15,500 Accts. receivable 91,500 Notes payable 93,500 Inventories 65,500 Accruals 19,500 Total current assets $ 243,000 Total current liabilities $ 128,500 Long-term debt 162,500 Net plant & equip. 419,500 Common equity 371,500 Total assets $ 662,500 Total liab. & equity $ 662,500 Statement of Earnings for 2018 Industry Average Ratios Net sales $ 642,500 Current ratio 2.2× Cost of goods sold 482,000 Quick ratio 1.7× Gross profit $ 160,500 Days sales outstanding 44 days Operating expenses 119,500 Inventory turnover 6.7× EBIT $ 41,000 Total asset turnover 0.6× Interest expense 14,500 Net profit margin 7.2% Pre-tax earnings $ 26,500…arrow_forwardThe balance sheet and income statement for the J. P. Robard Mfg. Company are as follows: Calculate the following ratios: Current ratio Times interest earned Inventory turnover Total asset turnover Operating profit margin Operating return on assets Debt ratio Average collection period Fixed asset turnover Return on equity J. P. Robard Mfg., Inc. Balance Sheet ($000) Cash $550 Accounts receivable 2,100 Inventories 1,060 Current assets $3,710 Net fixed assets 4,520 Total assets $8,230 Accounts payable $1,200 Accrued expenses 610 Short-term notes payable 280 Current liabilities $2,090 Long-term debt 2,000 Owners' equity 4,140 Total liabilities and owners' equity $8,230 J. P. Robard Mfg., Inc. Income Statement ($000) Net sales (all credit) $7,940 Cost of goods sold 3,310 Gross Profit $4,630 Operating expenses (includes $500 depreciation) 3,050 Net operating income $1,580 Interest expense 368 Earnings before taxes $1,212 Income taxes (40%) 485 Net income $727arrow_forwardFINANCIAL RATIOS Based on the financial statements, shown on pages 605606, for McDonald Carpeting Co. (income statement, statement of owners equity, and balance sheet), prepare the following financial ratios. All sales are credit sales. The balance of Accounts Receivable on January 1, 20--, was 6,800. 1. Working capital 2. Current ratio 3. Quick ratio 4. Return on owners equity 5. Accounts receivable turnover and the average number of days required to collect receivables 6. Inventory turnover and the average number of days required to sell inventoryarrow_forward
- FINANCIAL RATIOS Based on the financial statements, shown on pages 603604, for McDonald Carpeting Co. (income statement, statement of owners equity, and balance sheet), prepare the following financial ratios. All sales are credit sales. The balance of Accounts Receivable on January 1, 20--, was 6,800. 1. Working capital 2. Current ratio 3. Quick ratio 4. Return on owners equity 5. Accounts receivable turnover and average number of days required to collect receivables 6. Inventory turnover and average number of days required to sell inventoryarrow_forwardRatios Analyses: McCormick Refer to the information for McCormick above. Additional information for 20X3 it as follows (amounts in millions): Required: Next Level Compute the following for 20X3. Provide a brief description of what each ratio reveals about McCormick 1. return on common equity 2. debt-to-assets 3. debt-toequity 4. current 5. quick (McCormick uses cash and equivalents, short-term securities and receivables in their quick ratio calculation.) 6. inventory turnover days 7. accounts receivable turnover days 8. accounts payable turnover days 9. operating cycle (in days) 10. total asset turnover Use the following information for 14-17 and 14-18: The Hershey Company is one of the worlds leading producers of chocolates, candies, and confections. It sells chocolates and candies, mints and gums, baking ingredients, toppings, and beverages. Hersheys consolidated balance sheets for 20X2 and 20X3 follow.arrow_forwardJuroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.arrow_forward
- Ernst Companys balance sheet shows total liabilities of 32,500,000, total stockholders equity of 8,125,000, and total assets of 40,625,000. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio.arrow_forwardKlynveld Companys balance sheet shows total liabilities of 94,000,000, total stockholders equity of 75,000,000, and total assets of 169,000,000. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio.arrow_forwardRatio AnalysisPresented below are summary financial data from Porter’s annual report: Amounts in millions Balance Sheet Cash and Cash Equivalents $1,850 Marketable Securities 19,100 Accounts Receivable (net) 9,367 Total Current Assets 39,088 Total Assets 123,078 Current Liabilities 38,450 Long-Term Debt 7,279 Shareholders’ Equity 68,278 Income Statement Interest Expense 400 Net Income Before Taxes 14,007 Calculate the following ratios:(Round to 2 decimal points) a. Times-interest-earned ratio Answer b. Quick ratio Answer c. Current ratio Answerarrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,
- College Accounting, Chapters 1-27 (New in Account...AccountingISBN:9781305666160Author:James A. Heintz, Robert W. ParryPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning