Case Questions:
compare Lakeside calculations to the industry averages provided below:
RATIOS INDUSTRY AVERAGE 2008 LAKESIDE 2008
Current ratio 1.73.................................................................. 1.36
# Days inventory on hand 65 ...................................................................100.52
Receivables collection period 11 .......................................................................24.71
Debt-to-total assets 13% .....................................................................75%
Times interest earned 30 times ........................................................................2.79 times
Profit Margin 2.93% ......................................................................2.27%
Return on Assets 6.09% ......................................................................6.73%
** What is your overall assessment of the comparison of the ratios for Lakeside in 2008 as compared with the industry average?
Case Questions:
compare Lakeside calculations to the industry averages provided below:
RATIOS INDUSTRY AVERAGE 2008 LAKESIDE 2008
Current ratio 1.73.................................................................. 1.36
# Days inventory on hand 65 ...................................................................100.52
Receivables collection period 11 .......................................................................24.71
Debt-to-total assets 13% .....................................................................75%
Times interest earned 30 times ........................................................................2.79 times
Profit Margin 2.93% ......................................................................2.27%
Return on Assets 6.09% ......................................................................6.73%
** What is your overall assessment of the comparison of the ratios for Lakeside in 2008 as compared with the industry average?
Related questions
A large loss occurred in 2017 at Transpire Inc in Canterbury, rather than the expected profit. As a result, its stakeholders are concerned about the firmâs performance.
You are hired as the new Chief Financial Officer and are given the task of getting the company back into a sound financial position. Transpireâs 2016 and 2017 balance sheets and income statements, together with projections for 2018, are shown in the following tables. The tables also show the 2016 and 2017 financial ratios, along with industry average data. The 2018 projected financial statement data represent the best projection for 2018 results, assuming that some new financing is arranged to get the company âover the humpâ and back on track.
You must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.
Table 1. Transpire Inc. Balance Sheets
| Assets | 2016 | 2017 | 2018e | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($â000) | ($â000) | ($â000) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash | 8,000 | 7,482 | 15,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-Term Investments | 48,600 | 20,000 | 71,632 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Receivable | 351,200 | 652,160 | 878,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventories | 715,200 | 1,287,360 | 1,816,480 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Current Assets | 1,123,000 | 1,967,002 | 2,781,112 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Fixed Assets | 491,000 | 1,202,950 | 1,220,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Accumulated Depreciation | 146,200 | 263,160 | 383,160 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Fixed Assets | 344,800 | 939,790 | 836,840 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 1,467,800 | 2,906,792 | 3,617,952 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Table 2. Transpire Inc. Income Statements
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Table 3 Transpire Inc. other data
| Stock Price ($) | 85.00 | 60.00 | 78.00 | |
| Shares (units) | 100,000 | 100,000 | 250,000 | |
| Earnings per Share ($) | 6.88 | - | 1.59 | 3.41 |
| Dividend per Share ($) | 0.22 | - | 0.22 | |
| Tax Rate (%) | 40.00 | 40.00 | 40.00 | |
| Book Value per Share ($) | 6.638 | 5.960 | 7.909 | |
| Lease Payments ($) | 40,000 | 40,000 | 40,000 |
Table 4 Transpire Inc. Ratio Analysis
| 2016 | 2017 | 2018e | Industry | ||
| Average | |||||
| Current Ratio (X) | 2.34 | 1.50 | 2.67 | 2.00 | |
| Quick Ratio (X) | 0.85 | 0.52 | 0.93 | 1.00 | |
| Inventory Turnover (X) | 4.00 | 3.87 | 3.19 | 5.00 | |
| Average Age of Inventory (days) | 91.15 | 94.35 | 114.31 | 45.00 | |
| Average Collection Period (days) | 28.92 | 40.80 | 39.88 | 30.00 | |
| Average Payment Period (days) | 18.56 | 23.75 | 22.64 | 60.00 | |
| Fixed Asset Turnover (X) | 12.85 | 6.21 | 9.60 | 8.00 | |
| Total Asset Turnover (X) | 3.02 | 2.01 | 2.22 | 2.50 | |
| Debt Ratio (X) | 0.55 | 0.79 | 0.45 | 0.35 | |
| Debt to Equity Ratio (X) | 1.21 | 3.88 | 0.83 | 0.80 | |
| Times Interest Earned (X) | 19.35 | 0.10 | 18.78 | 25.00 | |
| Gross Profit Margin (%) | 35.38 | 14.64 | 27.82 | 28.00 | |
| Operating Profit Margin (%) | 27.28 | 0.30 | 18.70 | 17.00 | |
| Net Profit Margin (%) | 15.52 | - | 2.72 | 10.62 | 12.00 |
| Return on Total Assets (%) | 46.87 | - | 5.45 | 23.59 | 30.00 |
| Return on Equity (%) | 103.64 | - | 26.60 | 43.17 | 35.00 |
| Price/Earnings (P/E) Ratio (X) | 12.36 | - | 37.84 | 22.84 | 10.00 |
| Market/Book Value Ratio (X) | 12.81 | 10.07 | 9.86 | 7.00 |
Required:
Prepare a financial statement analysis of Transpire Inc. Your analysis should cover each of the following:
1. Why are ratios useful? Which three groups uses ratio analysis and for what reasons?
2.Transpireâs liquidity position (using current and quick ratios) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its liquidity position?
3.Transpireâs operating and utilisation of assets projected (using inventory turnover, average age of inventory, average collection period, average payment period, fixed asset turnover, and total asset turnover) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its operating and utilisation of assets position?
4.Transpireâs financial leverage (using debt ratio, debt to equity ratio, and times-interest-earned) in 2016, 2017, and projected for 2018. What actions should be taken to improve its financial leverage position?
5.Transpireâs profitability (using gross profit margin, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE)) in 2016, 2017, and projected for 2018. Compare it to the industry averages. What actions should be taken to improve its profitability position?
6.Analyse the projected 2018 price/earnings ratio and market/book value ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Explain your answers
7. Discuss the major strengths and weaknesses of the firm using the results of Du Pont analysis as projected for 2018
8.Perform a common size analysis and percent change analysis. What do these analyses tell you about Transpire? What actions should be taken to improve its overall financial position?
9.If one uses the industry average P/E ratio to estimate the firmâs share price in 2018, how much should it be? Comment on this method.
10.What are some potential problems and limitations of financial ratio analysis?
