Use the following financial statements for Magnet Computers to compute the reque
ID: 2776096 • Letter: U
Question
Use the following financial statements for Magnet Computers to compute the requested ratios. Next, prepare a written financial analysis of Magnet Computer by comparing Magnet ratios with the industry norms. Magnet Computers had an average of 10,000 common stock shares outstanding for 2009 and the stock price on December 31, 2009 was $ 40.00.
Magnet Computers Inc
Balance Sheet
Dec. 31, 2009
(Dollars in Thousands)
Assets Liabilities
Cash $200 Accts Pyble $205
Accts Recvble 245 Notes Pyble 425
Inventory 625 Other Current Liabilities 115
Total Current Assets $1070 Total Current Liab $745
Net Fixed Assets 1200 Long Term Debt 420
Total Assets $2,270 Total Liabilities $1165
Shareholders Equity $1105
Total Liab. & SE $2270
Magnet Computers Inc
Income Statement
For Year ended Dec. 31, 2009
(Dollars in Thousands)
Revenue
Sales $2400
Expenses
Cost of Goods Sold:
Materials $1000
Labor 600
Heat,Light & Power 89
Indirect Labor 65
Depreciation 80
Cost of Goods Sold $1834
Gross Profit $ 566
Selling Expenses $ 175
General and Admin expenses $ 216
EBIT $175
Interest Expense 40% 35
EBT $140
Taxes 40% 56
Net Income $ 84
A) Continued Compute Ratios
Magnet Computers Industry Norm
1. Current Ratio ____________ 1.53
2. Quick Ratio ____________ 1.02
3. Inventory Turnover ____________ 5.23
4. Fixed Asset Turnover ____________ 1.89
5 Total Asset Turnover ____________ 1.05
6 Average Collection Period ____________ 46.25 days
7 Debt to Total Assets ____________ 38.9%
8 Times Interest Earned ____________ 9.02
9. Profit Margin on Sales ____________ 5.2%
10. Return on Total Assets ____________ 4.5%
11. Return on Common Equity ____________ 6.5%
12. Earnings Per Share ____________ $12.65
13. Price/Earnings Ratio _____________ 15.65
14. Cashflow/Share _____________ $21.75
15. Price/ Cash Flow ____________ 2.95
16. Book Value Per Share _____________ NA
17. Market/ Book Ratio ____________ 4.65
B) Written Financial Analysis
Explanation / Answer
1. Current ratio = Current Assets / Current liabilities = 1,070 / 745 = 1.44:1
2. Quick ratio = (Current assets - Inventory) / Current liabilities = (1,070 - 625)/745 = 0.60:1
3. Inventory Turnover = Cost of goods sold / Average inventory = 1,834 / 625 = 2.93
4. Fixed Assets turnover = Net sales / Net Fixed Assets = 2,400 / 1,200 = 2 times
If we see the liquidity ration, viz Current Ratio and Quick ratio, are below the industry's norms which means the company is not managing the working capital properly and the company has poor working capital management. The company is in the risk of paying off its current liabilities because its Quick ratio is not just below the industry's norms but also its quick assets are less than its current liabilities. However, the company has lower inventory turnover than the industry's norms which is its plus point. Also higher fixed assets turnover than industry's norms is showing that company is efficiently using its fixed assets as compare to the other companies in the industry.
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