Question

Evaluate the performance of the firm in the following areas:

Liquidity management

Asset management

Debt management

Profitability management

When you explain the firm’s strength or weakness in each area, you must support your arguments through the evaluative reasoning process by providing reasons, methods, criteria, or assumptions behind the claims made.

esign Layout References Mailings Review View Help YTell me what y Use the following information to answer the following questions. ABC, Inc. Income Statement (in thousands) December 31, 2014 $200,000 140,000 60,000 56,000 4,000 し000 3,000 1,050 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income (EBIT)= Interest expense Earnings before tax Income tax Net income available to common stockholders $1,950 Number of shares outstanding Market price per share 1, 500 $22 ABC, Inc. Balance Sheet (in thousands) December 31, 2014 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets S2,000 17,800 8.700 28,500 70,000 26.500 43.500 S72.000 Liabilities and Equity Accounts payable $18,000 e to search di e

Answer 1

		ABC Inc		Industry Average
1)	LIQUIDITY RATIOS:	Calculation	Value		EVALUATION
	Current ratio	=28500/31350 =	0.91	1.10	The liquidty position of the firm is weak as the current ratio is lower than the industry average, notwithstanding the fact that the Quick ratio is marginally higher than the industry average.
	Quick ratio	=(2000+17800)/31350 =	0.63	0.60
2)	ASSET MANAGEMENT RATIOS:
	DSO (in days)	= 17800*365/200000 =	32.49	25.00	The asset management of the company is not satisfactory. The DSO is 7 days ore which indcates that more amount is locked up in receivables. The utilisation of assets, as evidenced by the turnover ratios, is also below industry standards. All these suggest that the asset management is below par.
	Fixed assets turnover	= 200000/43500 =	4.60	5.80
	Total asset turnover	=200000/72000 =	2.78	2.95
3)	DEBT MANAGEMENT:
	Liabilities-to-assets ratio	= 39600/72000 =	55.00%	65.00%	The debt management of the firm is better than the industry average. It has lower total debt/assets ratio, which has contributed to higher TIE, indicating higher safety to creditors.
	Times-interest-earned	= 4000/1000 =	4.00	3.20
4)	PROFITABILITY MANAGEMENT:
	Net profit margin	= 1950/200000 =	0.98%	1.30%	Profit management is not satisfactory considering the industry average. Though ROE is higher than industry average, the P/E and the MV/BV ratios are lower. These indicate that the profitbaility is lower due to which the market ratios are also lower.
	Return on equity	= 1950/32400 =	6.02%	7.32%
	Price/Earnings ratio	= 22/1.3 =	16.92	20.38
	Market/Book ratio	= 22/21.67 =	1.02	3.19
	CALCULATIONS:
	EPS = 1950/1500 = $1.3
	Book value per share = 32500/1500 = $21.67