151. (CMA Jun 96 #6) All-Things Inc. manufactures a variety of consumer products. The company’s founders have managed the company for thirty years and are now interested in retiring. Consequently, they are seeking to sell the company. Trial Associates is looking into the acquisition of All-Things and has requested the latest financial statements and selected financial ratios in order to evaluate All-Things’ financial stability and operating efficiency. The summary information provided by All-Things is presented below.
All-Things Inc.Income StatementFor the Year Ended May 31,Year 6(in thousands)
Sales (net)
$30,500
Interest income
500
Total revenue
$31,000
Costs and expenses:
Cost of goods sold
17,600
Selling and administrative expense
3,550
Depreciation and amortization expense
1,890
Interest expense
900
Total costs and expenses
$23,940
Income before taxes
7,060
Income taxes
2,900
Net income
$ 4,160
Selected Financial Ratios
5-Year
All-Things
Industry
Year 4
Year 5
Average
Current ratio
1.62
1.61
1.63
Acid-test ratio
.63
.64
.68
Total asset turnover
1.83
1.84
1.84
Inventory turnover
3.21
3.17
3.18
Times interest earned
8.50
8.55
8.45
Total debt to net worth (Total debt / Total shareholders’ equity)
1.02
.86
1.03
Net profit margin
12.1%
13.2%
13.0%
All-Things Inc.Comparative Statement of Financial PositionAs of May 31(In thousands)
Year 6
Year 7
Cash
$ 400
$ 500
Marketable securities (at cost)
500
200
Accounts receivable (net)
3,200
2,900
Inventory
5,800
5,400
Total current assets
$ 9,900
$ 9,000
Property, plant, and equipment (net)
7,100
7,000
Total assets
$17,000
$16,000
Accounts payable
$ 3,700
$ 3,400
Income taxes payable
900
800
Accrued expenses
1,700
1,400
Total current liabilities
$ 6,300
$ 5,600
Long-term debt
2,000
1,800
Total liabilities
$ 8,300
$ 7,400
Common stock ($1 par value)
2,700
2,700
Paid-in-capital in excess of par
1,000
1,000
Retained earnings
5,000
4,900
Total shareholders’ equity
$ 8,700
$ 8,600
Total liabilities and shareholders’ equity
$17,000
$16,000
Required:
a.
Calculate a new set of ratios for the fiscal Year 6 for All-Things Inc. based on the financial statements presented.
b.
Briefly explain the analytical use of each of the seven ratios presented, describing what the investors can learn about All-Things Inc.’s financial stability and operating efficiency.
c.
Identify two limitations of ratio analysis.
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