Financial Statement Analysis essay

FinancialStatement Analysis

FinancialStatement Analysis

Question17.4a)

Toget the Du Point Analysis on Best Care, the calculation will equateROE to the asset turnover, the profit margin, and the equitymultiplier (Liesz,2002).The formula for the calculation is as follows:Industry

TotalMargin= 3.8%

Totalasset Turnover= 2.1

EquityMultiplier = 3.2

Returnon Equity = 25.5%

BestCare

TotalMargin= Net Income/Total Revenue [1218/28613]*100 = 4.26%

Totalasset Turnover= Sales or Revenue/Total Assets =28613/9869 = 2.899

EquityMultiplier = Total Assets/ Stockholder’s Equity = 9869/2118 = 4.66

Returnon Equity = 57.545%

TheROE for the two are different with Best Care showing higher ROE thanthe industry values. This means that the company is working well asthe amount of net income returned as percentage of shareholder’sequity is higher. Looking at Best Care, it can be deduced that BestCare is generating sales while keeping the costs of goods lower(Easton, 2004).This is indicated by the higher profit margin in comparison to theindustry’s values. Additionally, Best Care also has a higherturnover of goods compared to what the industry has.

17.4b)

Returnon Assets (ROA) = Net Income/Average Total Assets

\$1,218/[(\$900 + \$2118)/2] = \$1,218/\$1,509 = 0.807 or 8.07

ROAis same as the industry’s value. This means that Best Care isproperly managing their assets to make profits.

CurrentRatio = Total Current Assets/ Total Current Liabilities

\$3,945/\$3,456= 1.14

BestCare is in a position to meet its debt obligations over 12 month’speriod(Delen, Kuzey &ampUyar, 2013).

DaysCash on hand= Cash and Cash Equivalent/ daily operating expenses

Operatingexpenses= 27,395

Days=365

Dailyoperating expenses = \$75.05

2737/75.05

DaysCash on hand = 36 days. Hence Best Care can continue to pay theoperating expenses for 36 days. This is a good number of days ascompared to the industry’s 41 days.

Theaverage collection period= Average Accounts receivable/ [AnnualSales/365]

=3945/[28613/365] = 50.32 days

DebtRatio= Total Liabilities/ Total Assets

&amp7,751/\$9,869= 0.785

Thedebt ratio is a bit high, and the business is riskier, theliabilities of Best Care are 78.5% of the assets. The assets are heldmore with the creditors compared to shareholders.

Debtto Equity Ratio

Liabilities/Equity

\$7,751/2,118 = 3.6596

Thereare 3 times as many liabilities as the equity, therefore, the assetsof Best Care are funded 3.6 to 1 by investors to creditors.

Fixedasset Turnover ratio = Sales or Revenue/Fixed Assets

=28613/5924 = 4.83

Fromthis, Best Care has been successful in using the fixed assets togenerate sales (Delen,Kuzey &ampUyar, 2013).

TimesInterest Earned Ratio = EBIT / Total Interest

EBIT= Net Sales-[Cost of Products Sold]

28613-[27395]+ [385]

EBIT=1603

TotalInterest = 385

=1603/385

TimesInterest Earned Ratio = 4.164

Thecompany is making enough to cover the interest expense. Best Care’sincome is 4.164 higher than the interest expense.

References

Delen,D., Kuzey, C., &ampUyar, A. (2013).Measuring firm performance usingfinancial ratios: A decision tree approach.&nbspExpertSystems with Applications,40(10),3970-3983.

Easton,P. D. (2004). PE ratios, PEG ratios, and estimating the impliedexpected rate of return on equity capital.&nbspTheaccounting review,&nbsp79(1),73-95.

Liesz,T. J. (2002). Really modified Du Pont analysis: Five ways to improvereturn on equity.