Historical Ratio Analysis: Column 4 of Table 4 was calculated using the U.S. Rep

Question

Historical Ratio Analysis: Column 4 of Table 4 was calculated using the U.S. Republic Corporation balance sheet and income statement3.
a. (9 points) Using the average ratios of the rm’s performance in the preceding two years to compare, historically 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 4, which you select to support your position.

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

The table is as shown below with reasons:

Current Ratio U As it is redcuing over the years Acid test ratio U It is lower than the industry average Receivable turnover U It is lower than the industry average Inventory Turover F It is higer than industry suggesting it is able to turover faster Long term debt to capitalization U Higher amount shows, larger debt Gross profit margin F Similar to industry- Slighltly lower Net Prfoit U Reducing with time and lower than industry average ROE F Better than industry average Return on tangible assets F Better than industry average Tangible asset turnover F Better than industry average Overall interest coverage U Lower tha industry, suggests higher debt Cash flow to long term debt U Lower tha industry, suggests higher debt

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