Question

C el 3 on Hows and Partid A ss 121 rative historical financial statements for Norben Monforturing of the preceding problemas 17. Comparative historical follows COGS Depreciation Tax Northern Manufacturing Income Statements For the years ended (5000) 12/31/X1 12/31/X2 12/31/X3 Sales $17.850 $20,510 $22,560 9,100 10,665 11.506 Gross margin $ 8,750 $ 9,845 $11,054 Expense 5,180 5,702 5,332 600 650 700 EBIT $ 2,970 $ 3,493 $ 5,022 Interest 800 910 1,180 EBT $ 2,170 $ 2,583 $ 3,842 868 1,033 1,537 Net income $ 1,302 $ 1,550 $ 2,305 Dividends paid $ 650 $ 750 $ 1,200 Stock sold 0 0 1,000 Lease payments $ 500 $ 700 $ 800 Northern Manufacturing Balance Sheets For the years ended (5000) ASSETS 12/31/XO 12/31/X1 12/31/X2 Cash $ 955 $ 980 $ 500 Accounts receivable 3,103 3,570 6,250 2,890 3,033 5,180 Inventory CURRENT ASSETS $ 6,948 $ 7,583 $ 11,930 Fixed assets $ 5,800 $ 6,650 $ Gross 7,500 (1,150) Accumulated deprec. (1,750) (2,400) $ $ 4,650 4,900 $ 5,100 Net $11,598 TOTAL ASSETS $ 12,483 $ 17,030 12/31/X3 $ 200 7,300 6 ,470 $ 13,970 $ 9,000 (3.100) $ 5,900 $ 19,870 LIABILITIES Accounts payable Accruals CURRENT LIABILITIES Long-term debt Equity TOTAL CAPITAL $ 1,860 385 S 2.245 $ 7,805 1,548 $ 9,353 $ 1,650 742 $ 2.392 $ 7,891 2,200 $ 10,091 $ 1,860 850 $ 2710 $ 11,320 3,000 $ 14,320 $ 2,210 220 $ 2,430 $ 12,335 5,105 $ 17,440 $11,598 TOTAL LIABILITIES & EQUITY Number of shares $ 12,483 300,000 $ 78.12 $ 17,030 300,000 $ 70.00 $ 19,870 315,000 $ 65.88 Stock price

Answer 1

SOLUTION:
a.   ANALYSIS output:

   NORTHERN MANUFACTURING  
   Income Statements  
   For the year ended 20X3  

	NORTHERN MANUFACTURING
	Income Statements
	For the year ended 20X3
			$	%
	Sales		$       22,560	100.0%
	Cost of Goods Sold		$       11,506	51.0%
	GROSS MARGIN		$       11,054	49.0%
	Expense		$         5,332	23.6%
	Depreciation		$            700	3.1%
	EBIT		$         5,022	22.3%
	Interest		$         1,180	5.2%
	EBT		$         3,842	17.0%
	Tax		$         1,537	6.8%
	NET INCOME		$         2,305	10.2%
	Lease Payments		$            800
	Dividends Paid		$         1,200
	Outstanding Shares		315,000
	Stock Price / share		$         65.88
NORTHERN MANUFACTURING
Balance Sheet
For the year ended 20X3
	20X2		20X3
ASSETS
Cash	$            500		$            200
Accounts Receivable	$         6,250		$         7,300
Inventory	$         5,180		$         6,470
CURRENT ASSETS	$       11,930		$       13,970
Fixed Assets
Gross	$         7,500		$         9,000
Accum. Deprec.	$        (2,400)		$        (3,100)
NET FIXED ASSETS	$         5,100		$         5,900
TOTAL ASSETS	$       17,030		$       19,870
LIABILITIES
Accounts Payable	$         1,860		$         2,210
Accruals	$            850		$            220
CURRENT LIABILITIES	$         2,710		$         2,430
Long Term Debt	$       11,320		$       12,335
Equity	$         3,000		$         5,105
TOTAL CAPITAL	$       14,320		$       17,440
TOTAL   L & E	$       17,030		$       19,870
RATIOS ANALYSIS
			20X3
LIQUIDITY RATIOS
Current Ratio			5.7
Quick Ratio			3.1
ASSET MANAGEMENT RATIOS
ACP			116.49	days
Inventory Turnover			1.8
Fixed Asset Turnover			3.8
Total Asset Turnover			1.1
DEBT MANAGEMENT RATIOS
Debt Ratio			74.3%
Debt to Equity Ratio			2.4	to 1
TIE			4.3
Cash Coverage			4.8
Fixed Charge Coverage			2.9
PROFITABILITY RATIOS
ROS			10.2%
ROA			11.6%
ROE			45.2%
MARKET VALUE RATIOS
EPS			$7.32
P/E Ratio			9.0
Market to Book Value Ratio			4.1

  
b. The steady increases in sales and profits look good, however, there appear to be some problems in current assets. The ACP has gone from 67 days (poor to begin with) to 108 days. That implies there may be some large uncollectible receivables. Inventory turns have also deteriorated indicating a possible overstatement.
              Liquidity ratios are improving, but in the light of the receivables and inventory, that may be a deceptive result. The company also seems to be running on very little cash. That could imply an effective cash management system or a shortage in spite of the high current assets.
              Debt is very high, but the trend is improving.
              Overall EPS is increasing but the P/E ratio and the stock's price are dropping a lot. That implies investors are concerned about something outside the ratio analysis. Perhaps people forecast bad times for the industry or the firm has a major threat hanging over it, like a lawsuit. This should be investigated