Question

(Ratio analysis) The financial statements and industry norms for Pamplin Inc. are shown in the popup window: a. Compute the ratios in the popup window,, for 2017 and 2018 to compare both against the industry norms. b. How liquid is the firm? c. Are its managers generating an adequate operating profit on the firm's assets? d. How is the firm financing its assets? e. Are its managers generating a good return on equity? Note: 15% of sales are cash sales, with the remaining 85% being credit sales. a. Compute the following ratios for 2017 and 2018 to compare both against the industry norms. (Round the numbers to two decimal places and select your evaluation from the drop-down menu.) Industry Norm 2017 2018 Evaluation Current ratio 5.00X Satisfactory Poor

Answer 1

Note: kindly leave comment if any more ratio is to be found, pop window shows only current ratio

Current Ratio 2017 = Current Assets/Current Liabilities = 1200/200 = 6

Current Ratio 2018 = Current Assets/Current Liabilities = 1200/300 = 4

Acid test Ratio 2017 = (Current assets-Inventory)/curr liab. = 650/200 = 3.25

Acid test Ratio 2018 =575/300 = 1.92

Debt Ratio 2017 = Total Liabilities/Total Assets = 800/2400 = 33.33%

Debt Ratio 2018 = Total Liabilities/Total Assets = 900/2600 = 34.62%

Times Interest Earned 2017 = EBIT/Interest Expense = 250/50 = 5

Times Interest Earned 2018 = EBIT/Interest Expense = 360/64 = 5.63

Total Asset Turnover 2017 = Sales/assets = 1200/2400 = 0.5

Total Asset Turnover 2018 = Sales/assets = 1450/2600 = 0.56

Fixed Asset Turnover 2017 = Sales/Fixed assets = 1200/1200 = 1

Fixed Asset Turnover 2018 = Sales/Fixed assets = 1450/1400 = 1.04

Operating Return on Assets 2017 = EBIT/Total Assets = 250/2400 = 10.42%

Operating Return on Assets 2018 = EBIT/Total Assets = 360/2600 = 13.85%

Operating Profit Margin 2017 = Operating Income/Sales = 250/1200 = 20.83%

Operating Profit Margin 2018 = Operating Income/Sales = 360/1450 = 24.83%

Return on Equity 2017 = Net Income / Total Common Equity = 158/1600 = 9.88%

Return on Equity 2018 = Net Income / Total Common Equity = 234/1700 = 13.76%

b) 1. Firm is more liquid compared to industry benchmarks in 2017 and less liquid in 2018.

Liquidity is measured by current and acid test ratio, higher the ratio greater the liquidity

2. Managers are generating attractive operating operating profits on the firm's assets

Because Operating Return on Assets of firm is greater than industry

3. Firm is Financing its assets at 33.33% and 34.62% whereas Assets of Industry are financed at 33%, lower the better

4. Managers are generating good Return on Equity ie. 9.88% and 13.76% which is Greater than industry of 9%