Carson Cutlery (the company) is being assessed by the independent ABC agency for

ID: 2600961 • Letter: C

Question

Carson Cutlery (the company) is being assessed by the independent ABC agency for potential acquisition. The company has provided its financial statements (Balance Sheet and Income Statement) to the ABC agency for assessment. You, an employee of the ABC agency, are requested to calculate the following six financial ratios defined in table 6.8 of your textbook: Current Ratio, Acid Test Ratio, Equity Rat Inventory Turnover Ratio, Renurn-on-Assets Ratio, and Return-on-Equity Ratio, for both reported years (i)Make and justify your recommendation based on the evaluation of the financial statements of the company and the ratios that you have determined, by comparing them against the industry standards provided below Ratio | Industry Standard Current ratio Acid-test ratio Equity ratio Inventory turnover ratio Return-on-asset ratio Return-on equity ratio 1.80 0.92 0.71 14.21 7.91% 11.14% TIP: Review the review problems 6.1 &6.2 in your textbook, using the provided industry standards for your recommendation analysis

Explanation / Answer

2015

industry

current ratio

current assets/current liabilities

295920/261573

1.131309

1.8

current ratio is less than industry average so company is poor on liquidity ground

Acid test ratio

quick assets/current liabilities

(295920-65000-22750)/261573

0.818204

0.92

acid test ratio is also less than industry average and company performance is poor on solvency

Equity ratio

total equity/total assets

228427/580000

0.39384

0.71

Euqity ratio is .3938 it means that 39% of assets are financed by equity while in industry equity ratio is 1 which means that company is highly leverged.

Inventory turnover ratio

cost of goods sold/average inventory

1130000/57500

19.65217

14.21

Inventory is contributing more in sales in company in comparison of industry

average inventory

(opening+closing)/2

(65000+50000)/2

57500

return on asset ratio

net income/average assets

51030/615000

8.30%

7.91%

return on asset is higher than the industry average

average assets

(opening +closing)/2

(650000+580000)/2

615000

return on equity

net income/average equity

51030/234413.5

21.77%

11.14%

return on equity is higher than the industry average

average equity

(opening+closing) /2

(240400+228427)/2

234413.5

Overall conclusion

company performance is poor in case of short term solvency and company is highly levered but its turnover ratio and profitability ratio is better than industry so it is a favorable investment