P14-37A. Ratio analysis over two years (Learning Objective 4) Comparative financ
ID: 2787376 • Letter: P
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P14-37A. Ratio analysis over two years (Learning Objective 4) Comparative financial statement data of Tennyson, Inc., follow: o un w N- | 2017 Tennyson, Inc. Comparative Income Statements For the Years Ended December 31, 2017 and 2016 (amounts in thousands) 2016 6 Sales revenues I$ 445,910 $ 425,080 7 Less: Cost of goods sold 236,000 224,000 8 Gross profit 209,910 IS 201,080 9 Less: Operating expenses 132,000 128,000 10 Operating income 77,910 $ 73,080 11 Less: Interest expense 10,600 11,600 12 Income before income taxes 67,310 S 61,480 13 Less: Income tax expense 18,860 19,630 14 Net income 48,450 $ 41,850 15Explanation / Answer
The ratios:
a. Current ratio = current assets / current liabilities
2017 = 362,000 / 200,000 = 1.81
2016 = 385,000 / 220,000 = 1.75
b. Times-interest-earned-ratio = EBIT / Interest
2017 = 77910 / 10600 = 7.35
2016 = 73080 / 11600 = 6.3
c. Inventory Turnover = COGS / average inventory
2017 = 236,000 / (163000+132000)/2 = 236,000 / 147500 = 1.6
2016 = 224,000 / (157000+163000)/2 = 224,000 / 160000 = 1.4
d. Operating income percentage = operating income / net sales
2017 = 77910 / 445910 = 17.47%
2016 = 73080 / 425080 = 17.19%
e. Return on common stockholders equity = Net income - preferred dividend / average common stockholders equity
Preferred dividend = 7% of 95000 = 0.07*95000 = 6650
2017 = 48450-6650 / (87000+133000)/2 = 41800 / 110000 = 38%
2016 = 41850-6650 / (133000+87000)/2 = 35200 / 110000 = 32%
f. Earnings per share of common stock = Net income / average common stockholders equity
2017 = 48450 / (87000+133000)/2 = 48450 / 110000 = 0.44
2016 = 41850 / (133000+87000)/2 = 41850 / 110000 = 0.38
g. Price/earings ratio = Market price/EPS
2017 = 43.51 / 0.44 = 98.89
2016 = 31.36 / 0.38 = 82.53
Answer 2. a. The ability of Tennyson's to pay debts decreased from 2016 to 2017 and the inventory improved as the ratio inproved from 1.4 to 1.6 from 2016 to 2017.
b. as the EPS increased from 0.38 to 0.44 in 2017 the investment attractiveness according to EPS increased but as PE ratio increased too the attractiveness decreased.
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