Question

Use the attached Income Statement and Balance Sheet to compute the required financial ratios for Seward Inc. and compare to the industry averages. After that, write a brief summary as to what each ratio is measuring and how Seward compares to the industry. For example, you may find that Seward's Inventory Turnover is not as high as the industry average, so they are either not managing their inventories or may be experiencing a decrease in sales.

Seward Industries a. Compute the ratios listed below for Seward and compare to the industry averages. Provide an explaination for how well you think Seward is performing as compared to others in the industry. 4,500 (2,800) 1,700 INCOME STATEMENT Sales COGS Gross Profit Operating Expenses: S,G,&A Depreciation Expense Total Operating Expenses Operating profits Interest Expense EBT Income Taxes Net Income (1,000) (200) (1,200) 500 (60) 440 Current ratio Days in receivables Days in inventory Net return on assets (ROA) Operating profit margin Total Debt to Assets Times interest earned Return on Equity (125) 315 3.0 40.0 70.2 12.5% 8.0% 33% BALANCE SHEET Cash Accounts Receivables Inventories Total Current Assets Gross Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets INDUSTRY AVERAGES Current ratio Days in receivables Days in inventory Net return on assets (ROA) Operating profit margin Total Debt to Assets Times interest earned Return on Equity 500 600 900 2,000 2,100 (800) 1,300 3,300 6.0 11.0% Liabilities & Equity Accounts Payable Short Term Notes Total Current Liabilities Long Term Debt Total Liabilities Common Equity: Common Stock Retained Earnings Total Common Equity Total Liabilities and Equity 500 300 800 400 1,200 500 1,600 2,100 3,300

Answer 1

a]

Current Ratio = Current Assets / Current Liabilities

Current Ratio = 2000 / 800 = 2.5

This ratio measures the adequacy of short-term assets to meet short-term obligations. Compared to the industry, the ratio is lower, which indicates that Seward has lower liquidity than the industry average.

Days in receivables = 365 * accounts receivable / sales

Days in receivables = 365 * 600 / 4500 = 48.7 days

This ratio measures the number of days that receivables take to be converted into cash. This ratio is higher than the industry average, which indicates that Seward is taking too long to convert receivables into cash. This may be due to longer credit period offered to customers.

Days in inventory = 365 * inventory / COGS

Days in inventory = 365 * 900 / 2800 = 117.3 days

This ratio measures the number of days that inventory takes to be converted into cash. This ratio is higher than the industry average, which indicates that Seward is taking too long to convert inventory into cash. This may be due to slow moving stock.

Return on Assets = Net Income / Total Assets

Return on Assets = 315 / 3300 = 9.5%

This measures the profitability relative to assets. This ratio is lower than the industry average, which indicates that Steward has lower profitability relative to the industry average. Steward may be using its assets inefficiently relative to the industry.

Operating profit margin = operating profit / sales = 500 / 4500 = 11.1%

This measures the operating profitability, relative to sales. This ratio is higher than the industry average, hence it is better than the industry. Steward seems to be managing operating expenses better than the industry.

Total debt to assets = total liabilities / total assets = 1200 / 3300 = 36%

This measures the proportion of assets financed by debt. This ratio is higher than the industry, which shows that Seward uses a higher level of debt relative to the industry.

Times interest earned = operating profit / Interest Expense

Times interest earned = 500 / 60 = 8.3

This measures the adequacy of operating earnings to make interest payments. This ratio is better than the industry average, as it is higher. Seward seems to have more than adequate earnings to meet interest obligations.

Return on equity = net income / total common equity

Return on equity = 315 / 2100 = 15.0%

This measures the profitability relative to equity. This ratio is higher than the industry average, which indicates that Steward has higher profitability relative to the industry average. Steward may be using its equity efficiently relative to the industry.