Question

2.4 The balance sheet that follows summarizes the financial conditions for Flex, Inc., an electronic outsourcing contractor, for fiscal-year 2005. Unlike Nano Network Corporation in Problem 2.3, Flex has reported a profit for several years running. Compute the various financial ratios and interpret the firm's financial health dur- ing fiscal-year 2005. Aug. 2005 Aug. 2004 U.S. $ (000) U.S. $ (000) (12 mos.) (Year) Balance Sheet Summary Cash Securities Receivables Allowances Inventory Current assets Property and equipment, net Depreciation Total assets Current liabilities Bonds Preferred mandatory Preferred stock Common stock Other stockholders' equity Total liabilities and equity Income Statement Summary Total revenues Cost of sales Other expenses Loss provision Interest expense 1,325,637 362,769 1,123,901 5,580 1,080,083 3,994,084 1,186,885 533,311 4,834,696 1,113,186 922,653 0 0 271 2,792,820 4,834,696 225,228 83,576 674,193 -3.999 788,519 1,887,558 859,831 -411,792 2,410,568 840,834 385,519 0 0 117 1,181,209 2,410,568 8,391,4095,288,294 7,614,5894,749.988 335,808 237,063 2.143 2,254 36,479 24,759 (Continued)

Answer 1

Debt Equity Ratio: The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. The D:E ratio for Aug 2005 and Aug 2004 has remained almost equal at 0.33, which shows debt has not increased Vs equity for the company. The company has enough retained earnings (Other equity) to repay its debt (Bonds).
D:E	=	Total Liabilites	/	Equity
		Aug.2005	Aug.2004
Total Liabilites (Bonds)		922,653	385,519
Equity		2,793,091	1,181,326
D:E		0.33	0.33
Times interest earned ratio: Is an indicator of a corporation's ability to meet the interest payments on its debt. The ratio shows that the company can comfortabily repay its interest commitment. The higher the ratio the better it is. Ratio for the company is 8.24 for Aug 2005, which shows the company can repay its interest 8 times from its operating income.
									Aug.2005	Aug.2004
								Income before interest (a)	438,869	298,989
								income tax (b)	138,407	100,159
interest expenses (c)	36,479	24,759
Times interest earned ratio [(a) - (b)] / (c)	8.24	8.03
Current Ratio is companies liquidity ratio. (company's current assets to its current liabilities). Current ratio for the company at 3.59 shows that company has enough cash and other liquid current assets avaiable to discharge its current liabilites.
									Aug.2005	Aug.2004
								Current Asset	3,994,084	1,887,558
Current liabilites	1,113,186	840,834
Current Ratio	3.59	2.24
Quick ratio: (cash+ marketable securites + receivables )/ current liabilites. Quick ratio tells us about the possition of company in case it has to meet its current liabilites on urgent basis due to business needs. It shows how a company can meet its liabilites with cash and other liquid assets without any other source of funds. A quick ratio of 2.53 shows comfortable liquidity position of the company.
								Cash	1,325,637	225,228
								marketable securites	362,769	83,576
receivables	1,123,901	674,193
current liabilites	1,113,186	840,834
Quick Ratio	2.53	1.17
The inventory turnover ratio is an important measure of how efficently company utilises its inventory. (COGS/ Average Inventory)
COGS	7,614,589	Aug.2005	Aug.2004
Average Inventory	934,301	1,080,083	788,519
Inventory turnover ratio	8.15
Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made (amount of accounts receivable during a given period by the total value of sales during the same period, and multiplying number of days).
								days	365	365	DSO of 49 shows that company on an average takes 49 days to recover its sales made. DSO can be different for different sectors and companies based on the industry practice. Lower the number better it is.
receivables	1,123,901	674,193
sales	8,391,409	5,288,294
DSO	49	47
The asset turnover ratio measures the value of a company's revenue relative to the value of its assets
								Total sales	8,391,409	Asset turnover ratio of 2.32 shows that the company churns 2.32 times its assets through sales on its assets. The higher the ratio better its is.
Begaining Asset	2,410,568
Ending Asset	4,834,696.00
average assets	3,622,632
Asset Turnover ratio	2.32
Profit margin is the net profit after deducting all the expenses and tax from its overall revenue.
	Aug.2005	Aug.2004	Profit margin of 4% shows that company makes 4% on its overall sales during the period.
Profit after tax	293,935	198,159
Total sales	8,391,409	5,288,294
Profit Margin	4%	4%
Return on total assets (ROTA) is a ratio that measures a company's earningsbefore interest and taxes (EBIT) relative to its total net assets.
				13% ROTA provides comparative for efficent utilisation of its assets to generate return.
Profit before interest and tax	468,821	Aug.2005	Aug.2004
average assets	3,622,632	4,834,696.00	2,410,568.00
ROTA	13%
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity
profit after tax	293,935	Aug.2005	Aug.2004	15% is the return shareholders are making from the business, based on the equity including other equity invested.
Average equity	1987208.5	2,793,091	1,181,326
ROE	15%
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS)
										P/E ratio gives the value over its EPS market has given.
Market price of Flex Inc	13.58
EPS	1.19
P/E ratio	11
Book value of equity per share (BVPS) is the equity available to common shareholders divided by the number of outstanding shares
number of shares	Net income / EPS		Book value of 11 Vs market price of 13.58 shows that the market value is higher than the book value.
net income	293,935
EPS	1
number of shares	247,004
Total equity	2,793,091
BVPS	11