Question

31. The following are the financial statements for Nederland Consumer Products Company f‹ fiscal year ended September 30, 2011.

Nederland Consumer Products Company Income Statement for the Fiscal Year Ended September 30, 2011

Net sales	$51,407
Cost of products sold	25,076
Gross margin	$26,331
Marketing, research, administrative exp.	15,746
Depreciation	758
Operating income (loss)	$ 9,827
Interest expense	477
Earnings (loss) before income taxes	$ 9,350
Income taxes	2,869
Net earnings (loss)	$ 6,481

Balance Sheet as of September 30, 2011

Assets:		Liabilities and Equity:
Cash and marketable securities	$ 5,469	Accounts payable	$ 3,617
Investment securities	423	Accrued and other liabilities	7,689
Accounts receivable	4,062	Taxes payable	2,554
Total inventories	4,400	Debt due within one year	8,287
Deferred income taxes	958	Total current liabilities	$22,147
Prepaid expenses and other		Long-term debt	12,554
receivables	1,803	Deferred income taxes	2,261
Total current assets	$17,115	Other noncurrent liabilities	2,808
Property, plant, and equipment,	25,304	Total liabilities	$39,770
at cost Less: Accumulated depreciation	11,196	Convertible class A preferred stock	1,526
Net property, plant, and equipment	$14,108	Common stock	2,141
Net goodwill and other intangible	23,900	Retained earnings	13,611
assets Other noncurrent assets	1,925	Total stockholders' equity (deficit)	$17,278
Total assets	$57,048	Total liabilities and equity	$57,048

Calculate all the ratios, for which industry figures are available below, for Nederland and compare the firm’s ratios with the industry ratios.

$9k=$

Current ratio Quick ratio Gross margin Net profit margin Debt ratio

Long-term debt to equity Interest coverage

ROA ROE

Industry Average 2.05

0.78

23.9Wo

12.3%

0.23

0.98

5.62

5.3Wo

18.8Wo

32. Refer to the preceding information for Nederland Consumer Products Company. Compute the firm's ratios for the following categories and briefly evaluate the company's performance using these numbers.
    1. Efficiency ratios.
    2. Asset turnover ratios.
    3. Leverage ratios.
    4. Coverage ratios.
33. Refer to the earlier information for Nederland Consumer Products Company. Using the DuPont identity, calculate the return on equity for Nederland, after calculating the ratios that make up the DuPont identity.

Answer 1

The the industry ratio data provided in question in not presented clearly. Hence it is solved considering the ratios as below.

Ratio	Industry	Company	Formula
Current ratio	2.05	0.77	current asset/current liability
quick ratio	0.78	0.57	current asset- inventory/current liability
gross margin	23.9	0.51	Gross profit/ revenue
net profit margin	0.123	0.13	net income/ net sales
debt ratio	0.23	0.70	total liability/ total assets
long term debt to equity	0.98	0.89	Long term debt/ shareholder's equity
Interest coverage	5.62	19.60	Earning before interest and tax/ interest expense
ROA	5.3	0.11	Net income/ total assets
ROE	18.8	0.38	Net income/ shareholder's equity
Efficiency ratios:
Asset turnover ratio		0.901118	Sales/ average total assets
leverage ratios
Debt ratio		0.70	total liability/ total assets
Interest coverage ratio		19.60168	Earning before interest and tax/ interest expense

Asset turnover ratio: Measures efficiency of company's assets to generate revenue. A higher ratio means the company is using its assets efficiently. We do not have industry asset turnover ratio to compare to, but usually a ratio higher than 1 is deemed to be better. Some industries however have asset turnover ratio lower than 1 and that is due to high asset investment which is slowly turned into returns as compared to companies dealing in fast moving goods.
As mentioned, Nederland is a consumer products company, which means that the assets turnover at a faster rate and hence the asset turnover ratio should be greater than 1. Since the ratio is less than 1, it means that the company assets are not used efficiently.

Debt ratio: Debt ratio measures the leverage effect on the company. Generally, a higher ratio implies that company has higher debt than equity and therefore it is deemed to be at a higher financial risk. Debt ratio varies largely based on the industries. As can be seen with the data provided, the industry ratio is .23 and the company ratio is .70, it shows that the company has higher debt level as compared to the industry and hence is not a favourable condition because higher debt attracts higher interest and higher risk.

Interest coverage ratio: This ratio shows the ease at which the company can payoff its interest commitment on the debt. Generally a higher coverage ratio is better, but it is industry specific. An interest coverage ratio helps understand the survival rate of the company. A Lower rate shows that company cannot finance its debts and hence survival rate is low. A high ratio may also be bad, since that might be because the company is not fully utilising the debt capacity. However in the case of Nederland, the ratio ratio is higher than that of industry and the interest ratio is also better than the industry, This shows that the company is managing its debts efficiently.