Question

2015 to compare 4-9. (Ratio analysis) The financial statements and industry norms are shown be for Pamplin, Inc.: a. Compute the financial ratios for Pamplin for 2014 and for 2015 to com both against the industry norms. b. How liquid is the firm? c. Areits managers generating an adequate operating profit on the firm's d. How is the firm financing its assets? e. Are its managers generating a good return on equity? INDUSTRY NORN 5.00 3.00 2.20 90.00 0.33 Current ratio Acid-test (quick) ratio Inventory turnover Average collection period Debt ratio Times interest earned Total asset turnover Foxed-asset turnover Operating profit margin Return on common equity 7.00 0.75 1.00 20% 9% 2015 $ 150 _525 $1,200 $2,600 (1,200 $1,400 Pamplin, Inc. Balance Sheet at 12/31/2014 and 12/31/2015 Assets Cash $ 200 Accounts receivable 450 Inventory 550 Current assets $1,200 Plant and equipment $2,200 Less accumulated depreciation (1.000) Net plant and equipment $1,200 Total Total assets $2.400 Liabilities and Owners' Equity Accounts payable $ 200 Notes payable-current (9%) Current liabilities $ 200 Bonds (833% interest) Total debt $ 800 Owners' equity common stock $ 300 Paid-in capital 500 Retained earnings 700 Total owners' equity Total liabilities and owners' equity $1,600 $2.400 $2.600 $ 150 150 $ 300 600 600 $ 900 $ 300 800 $1.700 $2,600

Answer 1

A)

Ratios	formula	2014	2015	Industry
Current Ratio	Current Assets/ Current Liabilities	$1,200/$200 =6	$1,200/$300 =4	5
Quick Ratio	Current Assets-Inventory/ Current Liabilities	($1,200-550)/$200 =$650/$200 =3.25	($1,200-625)/$300 = 575/$300 =1.916	3
Inventory Turnover	COGS/ Inventory	$700/$550 =1.2727	$850/$625 =1.36	2.20
Average collection period	365× Receivable/ Credit sales	(365×$450)/1,200×85% 365×$450/$1,020 = 161.02days	(365×$425)/$1,450×85% =155,125/$1,232.5 =125.86days	90
Debt Ratio	Total liabilities/ Total Assets	$800/$2,400 =0.33	$900/$2,600 =0.346	0.33
Time interest earned	EBIT/ Interest	$250/$50 =5	$360/64 =5.625	7
Total Assets Turnover	Sales/ Total Assets	$1,200/$2,400 =0.5	$1,450/$2,600 =0.557	0.75
Fixed Assets Turnover	Sales/ Fixed Assets	$1,200/$1,200 =1	$1,450/$1,400 =1.035	1
Operating Profit margin	Operating Profit/ Sales ×100	$250/1,200×100 =20.83%	$360/$1,450×100 =24.82%	20%
Return on common equity	Net Income / Equity ×100	$120/$1,600 ×100 =7.5%	$178/$1,700×100 =10.47%	9%

B)Liquid position

Ratio	2014	2015	Industry
Current Ratio	6	4	5
Quick Ratio	3.25	1.916	3

Liquidity of firm is above standard ratio ( for current ratio is 2 & quick Ratio is 1).

But while, In the year 2015 It is 4 less than industry ratio.

Overall liquidity of Pamplin firm is satisfactory.

C) profit generate by the Assets

Ratio	2014	2015	Industry
Inventory Turnover Ratio	1.27	1.36	2.20
Average collection period	161.02	125.86	90
Total Assets Turnover	0.5	0.557	0.75
Fixed Assets Turnover	1	1.035	1

Pamplin firm is less efficient in generating profit on the firm's Assets

Long average collection period,low Inventory Turnover Ratio shows blockage of cash in stock and receivable.

Firm has low Total Assets Turnover than Industry ratio means that firm isn't using its assets efficiently and most likely have management or production problem.

D) Financial Leverage

Ratio	2014	2015	Industry
Debt Ratio	0.33	0.346	0.33
Time Interest Earned	5	5.625	7

Most of the firm's Assets is backed by owners fund

Almost 70% of the asset is financed by shareholders fund and 30% is from Borrowed.

Firm has less risk of leverage.

E)Return

Ratio	2014	2015	Industry
Operating Profit Margin	20.83%	24.82%	20%
Return on Common Equity	7.5%	10.47%	9%

Pamplin firm has better profitability than Industry ratio in the year 2015.