Question

Marin Inc. manufactures a variety of consumer products. The company's founders have run the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser who will continue its operations, and a group of investors, Morgan Inc., is looking into the acquisition of Marin. To evaluate its financial stability and operating efficiency, Marin was requested to provide the latest financial statements and selected financial ratios. Summary information provided by Marin is as follows. Marin Inc. Income Statement For the Year Ended November 30, 2021 (in thousands) Sales (net) $ 30,430 Interest income 410 Total revenue 30,840 Costs and expenses Cost of goods sold 17,510 Selling and administrative expenses 3,510 Depreciation and amortization expense 1,810 Interest expense 830 Total costs and expenses 23,660 Income before taxes 7,180 Income taxes 2,872 Net income $ 4,308
If you could provie an answer and explanation that would be great!

Answer 1

Current ratio

The current ratio indicates a company's ability to meet short-term debt obligations

Formula for Current ratio is as below.

Current Ratio = Current Assets Current liabilities

Current ratio for the year 2021 = 1.55 ( 9780/6300)

Acid test ratio

The Quick Ratio, also known as the Acid test ratio, is a liquidity ratio that measures how sufficient a company’s short-term assets are to cover its current liabilities

Formula for Acid test ratio is as below.

Acid test ratio = Cash& cash equivalents +marketable securities +Accounts receivable Current Liabilities

Acid test ratio for the year 2021 = 0.60 {(350+230+3200)/6300}

Times interest earned

The Times Interest Earned (TIE) ratio measures a company’s ability to meet its debt obligations on a periodic basis.This ratio can be calculated by dividing a company’s EBIT by its periodic interest expense. The ratio shows the number of times that a company could, theoretically, pay its periodic interest expenses should it devote all of its EBIT to debt repayment.

A high TIE means that a company likely has a lower probability of defaulting on its loans, making it a safer investment opportunity for debt providers. Conversely, a low TIE indicates that a company has a higher chance of defaulting, as it has less money available to dedicate to debt repayment.

TIE ratio = EBIT/ Interest expense

TIE ratio for the year 2021 = 9.65 {(30840-17510-3510-1810)/830}

Profit margin on sales

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits.

Formula for profit margin s as below

Profit margin ratio = Net profit/revenue.

Profit margin for the year 2021 = 13.97% (4308/30840)

Asset Turnover ratio

The asset turnover ratio measures the efficiency of a company's assets to generate revenue or sales. It compares the dollar amount of sales or revenues to its total assets. The asset turnover ratio calculates the net sales as a percentage of its total assets.

Generally, a higher ratio is favored because there is an implication that the company is efficient in generating sales or revenues. A lower ratio illustrates that a company is not using the assets efficiently and has internal problems.

Formula for asset turnover ratio = Net sales/ Average total assets

Asset turnover ratio for the year 2021 =2.02 {30430/(16880+13290)/2}

Inventory turnover ratio

Inventory turnover, or the inventory turnover ratio, is the number of times a business sells and replaces its stock of goods during a given period. It considers the cost of goods sold, relative to its average inventory for a year or in any a set period of time

Formula for inventory turnover ratio is as below

Inventory Turnover Ratio = (Cost of Goods Sold)/(Average Inventory)

Inventory turnover ratio for the year 2021= 3.10 {17510/(6000+5300)/2}

So required ratios for the year 2021 are as below.

2021 Current Ratio Acid - test ratio Times interest earned Profit margin on sales Asset Turnover Inventory turnover 1.55 0.60 9.65 13.97% 2.02 3.10