Question

P15-27AUsing ratios to evaluate a stock investment 8. Comparative financial statement data of Sanfield, Inc. follow 1) SANFIELD, INC. Comparative Balance Sheet December 31, 2018 and 2017 2018 SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018 and 2017 201 2017 2018 2017 Assets Net Sales Revenue $ 462,000 Curent Aets $ 430,000 $ 97,000 $ 91.000 Cost of Goods Sold Cash 236,000 S 100.b00 207,000 213,000 117,000 10.000 Gross Profit Accounts Receivable, Net 226,000 217,000 164.000 142,000 Merchandse Inventory Operating Expenses 5,000 15.000 135,000 133,000 Prepaid Expemses Income from Operations 31.000 345.000 91,000 Total Cument Aets 84,000 177,000 215.000 Interest Expense Property. Plant, and Equipment, Net 8,000 12,000 S S80,000 $ 560,000 S599,000 Tetal Asets Income Before Income Tax 83,000 72,000 Income Tax Expense 18,000 22,000 Liabilities $ 222.000 $244.000 92.000 Net Income $ 65,000 Total Cument Liabilities $ 50,000 Long term Liablites Total Labilities 111.000 335,000 336,000 Stockholders Equity 92.000 92.000 Prefemred Stock, 4% Common Stockholders Equity, no par 85.000 132,000 153.000 5 560,000 S 580.000 Total Liabilities and Stockholders' Equity 1. Market price of Sanfield's common stock: $51.48 at December 31, 2018, and $37.08 at December 31, 2017. 2. Common shares outstanding: 16,000 on December 31, 2018 and 15,000 on December 31, 2017 and 2016. 3. All sales are on credit. Requirements 1 Compute the following ratios for 2018 and 2017: Current ratio b. Cash ratio c. Times-interest-earned ratio d. Inventory turnover e. Gross profit percentage 48.9% a. f. Debt to equity ration & Rate of return on common stockholders' equity h. Earnings per share of common stock i. Price/carnings ratio Decide (a) whether Sanfield's ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased. 2)

Answer 1

Answer:

a.Current Ratio = Current Assets / Current Liabilities

2018 = 365000 / 222000 = 1.64

2017 = 383000 / 244000 = 1.57

The ability to pay off Current Liabilities has increased in 2018

b.Cash Ratio = Cash & Cash Equivalents / Current Liabilities

2018 = 99000 / 222000 = 0.45

2017 = 97000 / 244000 = 0.40

c.Times Interest Earned Ratio = Income from Operations / Interest Expense

2018 = 91000 / 8000 = 11.38

2017 = 84000 / 12000 = 7

d.Inventory Turnover = Cost of goods sold / Avg. Inventory

2018 = 236000 / ( 142000 + 164000 ) / 2 = 236000 / 153000 = 1.54

2017 = 213000 / ( 164000 + 207000 ) / 2 = 213000 / 185500 = 1.15

e.Gross Profit percentage = Gross profit / Net Sales Revenue

2018 = 226000 / 462000 = 48.92%

2017 = 217000 / 430000 = 50.47%

Gross Profit percentage has reduced showing increase in expenses

f. Debt to Equity Ratio = Total Liabilities / Total Equity

2018 = 335000 / ( 92000 + 153000 ) = 335000 / 245000 = 1.37

2017 = 336000 / ( 92000 + 132000 ) = 336000 / 224000 = 1.5

Debt to Equity Ratio has reduced showing less riskiness

g.Return on Common Stockholders Equity = (Net Income - Preferred dividends ) / Avg. Common Stockholders Equity

2018 = (65000 - 3680 ) / ( 153000 + 132000 ) / 2 = 61320 / 142500 = 43.03%

2017 = (50000 - 3680 ) / ( 132000 + 85000 ) / 2 = 46320 / 108500 = 42.69%

Return on Common Stockholders Equity shows efficient use of shareholders

h.Earnings per share of Common Stock = (Net Income - Preferred dividends ) / Avg. Common Stock outstanding

2018 = (65000 - 3680 ) / ( 16000 + 15000 ) / 2 = 61320 / 15500 = 3.96

2017 = (50000 - 3680 ) / ( 15000 + 15000 ) / 2 = 46320 / 15000 = 3.09

Earning per has increased showing efficient use of assets

i.Price Earnings Ratio = Market Price / Earnings per share of Common Stock

2018 = 51.48 / 3.96 = 13

2017 = 37.08 / 3.09 = 12

The Common Stock has good price in Market in 2018 Showing increase in attractiveness