How liquid is the firm ? & how is the firm financing its assets ? & are the comm

Question

How liquid is the firm ? & how is the firm financing its assets ? & are the common stockholders receiving agood return on their investment? & is management generating adequate operating profit on the firm ? & compute the following ratios for both 2015 & 2016 Answer all the questions Using Pamplin Inc.'s financial statement s shown on the following pages: Pamplin Inc. Income Statement For Years Ending 12/31/2015 and 12/31/2016 2015 2016 S1,200 S1,450 Sales (all credit) Cost of goods sold Gross profit Operating expenses Depreciation Operating income Interest expense Net income before taxes Taxes (40%) S 500 600 30 40 220 250 200 240 S 250 S 360 50 64 $ 200 $ 296 80 118 Net income $ 120 $ 178

Explanation / Answer

a. current ratio = current assets/current liability

for 2015: 1200/200 = 6

for 2016: 1200/300= 4

inventory turnover ratio = cost of goods sold/average invenory

for 2015: 700/550 = 1.27

for 2016: 850/625 = 1.36

total assets turnover = net sales/average total assets

for 2015: 1200/2400 = 0.5

for 2016: 1450/2600 = 0.557

operating proft margin= operating income/net sales

for 2015: 250/1200 = 0.208

for 2016: 360/1450 = 0.248

operating income return on investment = operating income/total assets

for 2015: 250/2400 = 0.104

for 2016: 360/2600 = 0.138

debt ratio = total liabilities/total assets

for 2015: 1000/2400 =0.417

for 2016: 1200/2600 = 0.461

average collection period = 365 x Average Accounts Receivable/Net Credit Sales

for 2015: 365*450/1200 = 136.875

for 2016: 365*425/1450 = 106.98

fixed asset turnover = net sales/average fixed assets

for 2015: 1200/1200 = 1

for 2016: 1450/1400 = 1.03

return on equity : net profit/equity

for 2015: 120/1600 = 0.075 = 7.5%

for2016: 178/1700 = 0.104 = 10.4%

b. firm has better current ratio than industry. so its more liquid in comparison

c. for both the years the firm has lower operating income return on investment than industry. so its not adequate.

d. The firm finance its assets by a mix od debt and owner's equity. in 2015 41.7% debt and 58.3% equity. in 2016 46.1% debt and 53.9% equity.

e, firm has lower ROE than industry. so the common stockholders are not receiving agood return on their investment

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