Question

Listed are the 2018 financial statements for Garner's Platoon Mental Health Care, Inc. Spread the balance sheet and income statement. Calculate the financial ratios for the firm, including the internal and sustainable growth rates. Using the DuPont system of analysis and the industry ratios reported, evaluate the performance of the firm.

GARNERS' PLATOoON MENTAL HEALTH CARE, INC. Balance Sheet as of December 31, 2018 (In millions of dollars) Assets Llabilities and Equity Current assets Current liabilities $ 421 $ 316 Cash and marketable securities Accrued wages and taxes Accounts receivable 1,109 Accounts payable 867 Inventory 1.760 $ 3,290 Notes payable 872 $ 2,055 $ 3,090 Total Total Long-term debt Fixed assets $ 5,812 840 Gross plant and equipment Stockholders' equity Less: Depreciation Preferred stock (30 million shares) Common stock and paid-in $ 60 $ 4,972 Net plant and equipment surplus (200 million shares) 637 Retained earnings Other long-term assets 892 3,312 $ 4,009 $ 9,154 $5,864 Total Total $ 9,154 Total assets Total liabilities and equity

Answer 1

Answer:

Garners' Platoon Mental Health Care, Inc. Current ratio 1.60 times Quick ratio 0.74 times Cash ratio 0.20 times Inventory turnover ratio 2.83 times Days' sales in inventory 129.00 days Average collection period 81.28 days Average payment period 133.47 days Fixed asset turnover ratio 1.00 times Sales to working capital 4.03 times Total asset turnover ratio 0.544 times Capital intensity ratio 1.84 times Debt ratio 56.20% Debt-to-equity ratio 1.28 times Equity multiplier 2.318 times Times interest earned 7.65 times Cash coverage ratio 8.28 times Profit margin 25.44% Basic earnings power ratio 26.32% Industry 2.0 times 1.2 times 0.25 times 2.50 times 146.00 days 91.00 days 100.00 days 1.25 times 4.00 times 0.50 times 2.00 times 50.00% 1.00 times 2.00 times 7.25 times 8.00 times 18.75% 19.90%

ROA ROE Dividend payout ratio Market-to-book ratio PE ratio 13.84% 32.08% 31.18% 1.36 times 4.24 times 9.375% 18.75% 35% 1.30 times 4.10 times

The ROA and ROE DuPont equations for Garner’s are calculated as follows:

ROA = Profit margin × Total asset turnover

13.84% = 25.44% × 0.544 times

While industry average is 9.375% (i.e. 18.75% × 0.50 times)

ROE = Profit margin × Total asset turnover × Equity multiplier

32.08% = 25.44% × 0.544 times × 2.318 times

While industry average is 18.75% (i.e. 18.75% × 0.50 times × 2.00 times)

From the above ratios, it can be seen that, Garner’s Platoon Mental Health Care, Inc. is more profitable than the average firm in the industry when it comes to overall efficiency expressed as ROA and ROE.

The DuPont equation highlights that such superior performance comes from both profit margin and total asset turnover.

Thus, the firm is using relatively high levels of debt and low levels of equity compared to the industry.