SPJIMR: PGMPW 2022: Financial Statement Analysis

Topic: Financial Statement Analysis

3. Dorex Inc., presented the following comparative income statements for 2019,2018 and 2017.
2019 2018 2017
Net Sales 16,00,000 13,00,000 12,00,000
Other income 22,100 21,500 21,000
Costs and Expenses 7,40,000 6,24,000 5,76,000
Material and manufacturing costs 90,000 78,000 71,400
R&D 6,00,000 5,00,500 4,65,000
General and selling 19,000 18,200 17,040
Interest 14,000 13,650 13,800
NPBT 1,59,100 87,150 77,760
Provision for Income taxes 62,049 35,731 32,659
NPAT 97,051 51,419 45,101

Other Relevant Information

Average common share issued 29,610 29,100 28,800
Average long term debt 2,11,100 1,21,800 2,14,000
Average Stockholders’ equity 8,11,200 7,90,100 7,70,000
Average total assets 14,40,600 12,20,000 11,80,000
a. Calculate the following for 2019,2018 & 2017
i. Net profit margin ii. Return on assets iii. Total asset turnover
iv. Operating income margin v. Return on Investment vi. Return on total equity

b. Based on the computations, summarize the trend in profitability for this firm.
4.
Abercrombie & Fitch Limited Brands GAP
2010 2009 2010 2009 2010 2009
Net profit margin 4.33 2.70 8.37 5.19 8.21 7.76
Return on Assets 5.21 2.78 11.82 7.07 16.00 14.17
Return on Total Equity 8.08 4.30 43.98 21.63 26.84 23.76

Abercrombie & Fitch: It is a specialty retailer that operates stores and direct to consumer operations.
Limited Brands: It operates in the highly competitive specialty retail business.
GAP: They are a global specialty retailer offering apparel, accessories, and personal care products.

Comment on the ratios for these companies, considering the trends.

1/SM
SPJIMR: PGMPW 2022: Financial Statement Analysis

5. Allen Company and Barker Company are competitors in the same industry. Selected financial
data from their 2019 statements are as follows:
Balance Sheet
Allen Company Barker Company
(Rs.) (Rs.)
Cash 10,000 35,000
Accounts Receivable 45,000 1,20,000
Inventory 70,000 1,90,000
Investments 40,000 1,00,000
Intangibles 11,000 20,000
Property, Plant and Equipment 1,80,000 5,20,000
Total Assets 3,56,000 9,85,000
Accounts payable 60,000 1,65,000
Bonds payable 1,00,000 4,10,000
Preferred stock @ Re. 1 50,000 30,000
Common stock @ Rs. 10 1,00,000 2,80,000
Retained earnings 46,000 1,00,000
Total Liabilities and capital 3,56,000 9,85,000
Income Statement
Allen Company Barker Company
(Rs.) (Rs.)
Sales 10,50,000 28,00,000
Cost of goods sold 7,25,000 20,50,000
Selling and admin. Expenses 2,30,000 5,80,000
Interest Expense 10,000 32,000
Income Taxes 42,000 65,000
Net Profit after taxes 43,000 73,000
Industry Averages:
Times Interest earned 7.2 times
Debt / Equity 66.6%
Required:
i. Compute the following ratios for each company:
a. Times Interest earned
b. Debt Equity ratio
ii. Is Barker Company in a position to take on additional long term debt? Explain.
Which company has the better long term debt position? Explain
6. Mr. Parks has asked you to advise him on the long term debt paying ability of Arodex Company.
He provides you with the following ratios:
2019 2018 2017
Times Interest Earned 8.2 6.0 5.5
Debt to Equity 80% 81% 81%
Required:
a. Give the implications and the limitations of each item separately and then the collective
influence that could be drawn from them about Arodex Company’s long term debt position.
b. What warnings should you offer Mr. Parks about the limitations of ratio analysis for the
purpose stated here?
2/SM