Cross Sectional Ratio Analysis: Column 4 of Table 5 was calculated using the U.S

Question

Cross Sectional Ratio Analysis: Column 4 of Table 5 was calculated using the U.S. Republic Corporation balance sheet and income statement.

a. (9 points) Using the industry average of the rm’s performance to compare, cross-sectionally evaluate the company’s performance in 2013 by indicating whether the rm’s current performance is either favorable(F) or unfavorable(U). You are analyzing the rm from the perspective of an outside investor who does not hold shares in the company.

b. (1 point) Evaluate the overall position of the company as either favorable or unfavorable for investment based on the three strongest ratios in Table 5, which you select to support your position.

Table 5 U.S. Republic Corporation

Cross-Sectional                                                   Industry     Evaluation

Ratio Analysis          2011      2012      2013         2013          F or U

1. Current ratio          250%     200%    162.5%     225%

2. Acid-test ratio        100%       90%       75%       110%

3. Receivables

   turnover                    5.0×        4.5×        3.3×      6.0×

4. Inventory turnover    4.0×        3.0×       4.1×       4.0×

5. Long-term debt to

    capitalization            35%         40%       54%      33%

6. Gross prot margin   39%         41%       39%      40%

7. Net prot margin        17%        15%        10%      15%

8. Rate of return on

     equity                        15%         20%        22%     20%

9. Return on tangible

     assets                        15%         12%       13%      10%

10. Tangible asset

       turnover                    0.9×          0.8×       1.3×      1.0×

11. Overall interest

      coverage                    11×            9×           6×        10×

12. Cash ow to long-

       term debt                  0.66         0.59        0.48       0.60

Explanation / Answer

(a)

(1) Current ratio (CR) - U

(Since CR is consistently falling and is lower than industry average).

(2) Acid-test ratio / Quick ratio (QR) - U

(Since QR is consistently falling and is lower than industry average)

(3) Receivables turnover - U

(This ratio is consitently falling and is lower than industry average).

(4) Inventory turnover - F

(After a drop, this ratio is rising & is higher than industry average)

(5) Long-term debt to capitalization - U

(The ratio is rising & is higher than industry average, indicating a higher-than-average debt level)

(6) Gross profit margin - U

(Ratio is fluctuating & is below average)

(7) Net profit margin - U

(Ratio is consistently decreasing & is below average, so profitability is lower-than-average)

(8) Return on equity (ROE) - F

(ROE is increasing & above average)

(9) Return on asset (ROA) - F

(Though ROA is falling, it is much higher than industry average)

(10) Asset turnover - F

(Asset turnover is higher than average)

(11) Interest coverage - U

(The ratio is decreasing & much below industry average)

(12) Cash flow to long-term debt - U

(The ratio is decreasing & much below industry average)

(b) Overall position of the company is weak.

Its liquidity position is declining (Current & acid-test ratios are low), Profitability is weak (Gross and net profit margins are lower than industry average) and Leverage is high (Debt to capitalization ratio is high).

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.