Question

$10,006,000 7505000 $2,501,000 Given the following financial statements Sterling Company Income Statement for the Year Ended December 31, 2015 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate=40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders Earnings per share (EPS) $293,000 635000 48200 192000 1168200 $1,332,800 212000 $1.120.800 448320 $672,480 52400 $620,080 $2.91 Sterling Company Balance Sheet December 31, 2015 Assets Liabilities and Stockholders' Equity Current assets Current liabilities Cash $222.000 Accounts payable [b] $879,000 Marketable securities 48900 Notes payable 217000 Accounts receivable 813000 Accruals 117000 Inventories 937000 Total current liabilities $1,213,000 Total current assets $2,020,900 Long-term debt (includes financial leases) (0) $2,875,900 Gross fixed assets (at cost) [a] $11,980,000 Stockholders' equity Less: Accumulated depreciation 3014000 Preferred stock (23,800 Net fixed assets $8.966.000 shares, $2.50 dividend) $1,017,000 Common stock (213,000 Other assets $975,000 shares at $3.00 par) (d) 639000 Paid-in capital in excess of par value 5211000 Retained earnings 1006000 Total stockholders' equity $7,873,000 Total liabilities and Total assets $11.961 900 stockholders' equity $11,961,900 [a] The firm has an 8-year financial lease requiring annual beginning-of-year payments of $@CNUM(48200). Five years of the lease have yet to run. [b] Annual credit purchases of $6,218,000 were made during the year. cl The annual principal payment on the long-term debt is $91,000. [d] On December 31, 2015, the firm's common stock closed at $38.02 per share. 1,4 historical ratios, and industry averages Historical and Industry Average Ratios for Sterling Company Ratio Actual 2013 Actual 2014 Industry average, 2015 Current ratio 1,55 1,85 Quick ratio 1,01 0,93 1,06 Inventory turnover 9, 649 ,33 8,72 Average collection period 46.1 days 37.4 days 36.00 days Average payment period 57.9 days 60.2 days 45.0 days Total asset turnover 0,75 0,81 Debt ratio 0,19 0,19 Times interest earned ratio 7.1 Fixed-payment coverage ratio Gross profit margin Operating profit margin 0,12 0,12 Net profit margin 0,063 0,063 0,054 Return on total assets (ROA) 0,046 0,041 Return on common equity (ROE) 0,061 0,067 0,066 Earnings per share (EPS) $1.61 $2.06 Price/earnings (P/E) ratio 12,1 10,6 11,3 Market/book (M/B) ratio 1,22 1,07 1,121 calculate Sterling Company's financial ratios for the most recent year. (Assume a 365-day year.) Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint Break your analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market 0,051 $1.36

Answer 1

Profitability Ratios:

Return on Equity % = Earning after tax / Stockholders' equity

For 2015 : 620,080 / 7,873,000 = 7.88%

Return on total Assets % = Earning after tax / Total Assets

For 2015: 620,080 / 11,961,900 = 5.18%

Net Profit margin % = Earning after tax / Net sales

For 2015: 620,080 / 10,006,000 = 6.20%

Gross margin % = Gross profit / Sales

For 2015: 2,501,000 / 10,006,000 = 25%

Operating Profit margin % = Operating Profit / Net sales

For 2015: 1,332,800 / 10,006,000 = 13.32%

Valuation:

Price / Earnings ratio = Market price per share / Earning per share

for 2015: 38.02 / 2.91 = 13.07

Market to book ratio = Market price per share / Book value per share

for 2015: 39.02 / (7,873,000 / (2.91 * 620,080 ) ) = 8.71

Asset Turnover:

Fixed assets Turnover = Net sales / Assets

For 2015 :10,006,000 / 11,961,900 = 0.84

Inventory Turnover = COGS / Inventory

For 2015 : 7,505,000 / 937,000 = 8.01

Collection Period = 365 * (Account Receivable / sales)

For 2015: 365 * (813,000 / 10,006,000) = 29.66 days

Payable period = 365 * (Account payable / Sales)

For 2015: 365 * ( 879,000 / 10,006,000) = 32.06 days

.

Leverage and Liquidity Ratio:

Debts ratio = ( Current Liablities + Long term debt ) / Total assets

For 2015: 4,088,900 / 11,961,900 = 0.34

Total interest earned ratio = EBIT / Interest

For 2015: 1,332,800 / 212,000 = 6.29

Current Ratio = Current assets / current liabilty

For 2015: 2,020,900 / 1,213,000 = 1.67

Quick ratio = (Current assets - Inventory) / Current liabilty

For 2015: (2,020,900 - 937,000) / 1,213,000 = 0.89