Consider the following financial statements for Green Valley Nursing Home, Inc.
ID: 2677545 • Letter: C
Question
Consider the following financial statements for Green Valley Nursing Home, Inc. a for profit long-term care facility:Green Valley Nursing Home Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2011
Revenue:
Net patient service revenue $3,163,258
Other revenue 106,146
Expenses:
Salaries and benefits $1,515,438
Medical supplies and drugs 966,781
Insurance and other 296,357
Provision for bad debts 110,000
Depreciation 85,000
Interest 206,780
Total expenses $3,180,356
Operating Income $89,048
Provision for income tax 31,167
Net Income $57,881
Retained earnings, beginning of year $199,961
Retained earnings, end of year $257,842
Green Valley Nursing Home Inc.
Balance Sheet
December 31, 2011
Assets
Current assets:
Cash $105,737
Marketable securities 200,000
Net patient accounts receivables 215,600
Supplies 87,655
Total current assets $608,992
Property and equipment $2,250,000
Less accumulated depreciation 356,000
Net property and equipment $1,894,000
Total assets $2,502,992
Liabilities and Shareholders Equity
Current liabilities:
Accounts payable $72,250
Accrued expenses 192,900
Notes payable 100,000
Current portion of long-term debt 80,000
Total current liabilities $445,150
Long term debt $1,700,000
Shareholders Equity:
Common stock, $10 par value $100,000
Retained earnings 257,842
Total shareholders equity $357,842
Total liabilities and shareholders equity $2,502,992
a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
Total margin 3.5%
Total asset turnover 1.5
Equity multiplier 2.5
Return on equity 13.1%
b. Calculate and interpret the following ratios:
Return on assets (ROA) 5.2%
Current ratio 2.0
Days cash on hand 22 days
Average collection period 19 days
Debt ratio 71%
Debt to equity ratio 2.5
Times interest earned (TIE) ratio 2.6
Fixed asset turnover ratio 1.4
c. Assume that there are 10,000 shares of Green Valleys stock outstanding and that some recently sold for $45 per share.
- What is the firms price/earnings ratio?
- What is its market/book ratio?
Explanation / Answer
(a)
Profit margin = Profit after tax ÷ Total revenue
= $57,881 ÷ $3,269,404
= 0.0177 or 1.77%
Industry average was 3.5%
Company profit margin is very less when compared to the industry average. It should try to increase profits or reduce costs.
Asset turnover = Total revenue ÷ Total assets
= $3,269,404 ÷ $2,502,992
= 1.31
Industry average was 1.5
Assets turnover ratio was less than the industry average. Assets should be used to produce more revenue.
Equity multiplier = Assets ÷ Shareholder’s equity
= $2,502,992 ÷ $357,842
= 7
Industry average was 2.5.
Equity multiplier was very higher than the industry average. Thus, firm is having more debt than the industry average.
Return on equity = Profit after tax ÷ Shareholder’s equity
= $57,881 ÷ $357,842
= 16.18%
Industry average was 13.1%
Since, return on equity was more than industry average, firm is operating better than the other companies in the industry.
(b)
Return on assets = Profit after tax ÷ Total assets
= $57,881÷$2,502,992
= 2.31%
Industry average was 5.2%
Firm is not up to industry average for using assets to generate profits.
Current ratio = Current assets ÷ Current liabilities
= $608,992÷$445,150
= 1.37
Industry average was 2.0
Idle ratio was 1. Though the current ratio was less than the industry it has the enough liquidity.
Days cash on hand
= Cash and cash equivalents ÷ Cash operating expenses per day
= ($105,737+$200,000) ÷ [($1,515,438+ 966,781+ 296,357) ÷ 365]
= 40.16
Industry average was 22 days.
Therefore, firm has more liquidity than the other companies in the industry.
Average collection period = (Accounts receivable × 365) ÷ Total sales
= ($215,600×365) ÷ $3,269,404
= 24.07
Industry average was 19 days.
Collection period of the company was more than the industry average. Company has to employ some alternatives to improve collection period.
Debt ratio = Total debt ÷ Total assets
= 1,700,000÷$2,502,992
= 67.92%
Industry average was 71%
Debt ratio is almost equal to industry average. Hence, the firm has similar risk level.
Debt equity ratio = Debt ÷ Equity
= $1,700,000÷ $357,842
= 4.75
Industry average was 2.5
Idle debt equity ratio was 2:1 but the company has more than double debt equity ratio. Company should reduce debt portion in capital structure.
Times interest earned ratio
= Earnings before interest and tax ÷ Interest expense
= ($206,780+$89,048) ÷ $206,780
=1.43
Industry average was 2.6
Firm has less time interest earned ratio when compared to industry average. Firm has to reduce interest liability or has to increase firm profits.
Fixed assets turnover ratio = Total revenue ÷ Fixed assets
= $3,163,258÷ $1,894,000
= 1.67
Industry average was 1.4
Fixed assets turnover ratio of the firm was better than the industry average. Firm is efficient than the other companies in the industry to generate revenue.
(c)
Price earnings ratio = market price per share ÷ earnings per share
= $45 ÷ ($57,881÷10,000)
= 7.77 times
Market/book ratio = Market capitalization ÷ Book value
= $45×10,000 ÷ ($2,502,992- $445,150-1,700,000)
= 1.26
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