Hi again thanksmate-ga,
First, let's define all the terminology used in the questions:
Current ratio - Indicator of short-term debt-paying ability.
Determined by dividing current assets by current liabilities. The
higher the ratio, the more liquid the company.
Acid test ratio - Also called the quick ratio, the ratio of current
assets minus inventories, accruals, and prepaid items to current
liabilities.
Accounts receivable turnover - The ratio of net credit sales to
average accounts receivable, which is a measure of how quickly
customers pay their bills.
Inventory turnover - A measure of how often the company sells and
replaces its inventory. It is the ratio of annual cost of sales to the
lastest inventory. One can also interpret the ratio as the time to
which inventory is held. For example a ratio of 26 implies that
investory is held, on average, for two weeks. It is best to use this
ratio to compare companies within an industry (high turnover is a good
sign) because there are huge differences in this ratio across
industries.
Debt/equity ratio - Indicator of financial leverage. Compares assets
provided by creditors to assets provided by shareholders. Determined
by dividing long-term debt by common stockholder equity.
Times-interest-earned ratio - Earnings before interest and tax,
divided by interest payments.
Return on sales - A measurement of operational efficiency equalingnet
pre-tax profits divided by net sales expressed as a percentage.
Asset turnover - The ratio of net sales to total assets.
Return on assets (ROA) - Indicator of profitability. Determined by
dividing net income for the past 12 months by total average assets.
Result is shown as a percentage. ROA can be decomposed into return on
sales (net income/sales) multiplied by asset utilization
(sales/assets).
Return on equity (ROE) - Indicator of profitability. Determined by
dividing net income for the past 12 months by common stockholder
equity (adjusted for stock splits). Result is shown as a percentage.
Investors use ROE as a measure of how a company is using its money.
ROE may be decomposed into return on assets (ROA) multiplied by
financial leverage (total assets/total equity).
All of the above terms were defined in Campbell R. Harvey's
Hypertextual Finance Glossary. Just select the first letter of the
term you are looking for and presto! The main page is located at:
http://www.duke.edu/~charvey/Classes/wpg/glossary.htm
(this is definitely a site worth bookmarking)
Now on to your questions:
1. Prepare a columnar report comparing the industry averages for the
ratios published by the trade association with the comparable ratios
for Heartland. Compute the ratios as of December 31, 2001, or for the
year ending 31, 2001, whichever is appropriate.
First, here are the individual calculations for each measure, then the
summarized table:
Current ratio = CA/CL
= 31100/33945
= 0.916
Quick ratio = (CA - inventory)/CL
= (31100 - 12680)/33945
= 0.543
AR Turnover = Sales / AR
= 542750 / 15650
= 34.68
Inventory turnover = Cost of goods sold / inventory
= 435650/12680
= 34.36
Debt/Equity Ratio = Total Debt / Total equity
= (CL + LTD)/TE
= (33945 + 80000)/165580
= 0.688
Times interest earned = EBIT/Interest
= 41100/9275
= 4.43
Return on Sales = Pretax profit / net sales
= 31825 / 542750
= 0.0586
= 5.86%
Asset turnover = Sales / Assets
= 542750 / 279525
= 1.94
Return on Assets = Net income / Assets
= 19095/279525
= 6.83%
Return on Equity = Net Income/Equity
= 19095 / 165580
= 11.53%
Summarized table:
Ratio Industry Average Heartland
Current 1.23 0.916
Quick 0.75 0.543
A/R Turnover 33 34.68
Inventory Turnover 29 34.36
Debt/Equity 0.53 0.688
Times interest earned 8.65 4.43
Return on Sales 6.57% 5.86%
Asset Turnover 1.95 1.94
Return on Assets 12.81% 6.83%
Return on equity 17.67% 11.53%
2. Briefly evaluate Heartland?s ratios relative to the industry averages.
The current and quick ratios measure the ability of the firm to easy
liquidize - in both measures Heartland is significantly lower than the
industry average, and so this may be a problem.
The inventory, asset, and A/R turnover measures collectively reflect
how well the firm is utilizing its assets. Heartland is managing it
inventory and receivables better than the industry average, and asset
turnover (the collective measure) is the same as the industry average.
Financial leverage is measured with the Debt/equity ratio and times
interest earned measure. Heartland relies more heavily on debt (rather
than equity) and as a result is suffering a low times interest earned
measure. These two are clearly correlated because you will owe more
interest if you carry a larger debtload.
Profitability is measured through ROS, ROA, and ROE. In general, we
can say that Heartland is not as profitable as an average company that
has a similar asset and liability structure.
3. Do you think the bank will approve the loan? Please explain your answer.
I do not believe that the bank will approve the loan if it actually
does use the survey data as a bnechmark against Heartland's financial
statements. Even if the loan is approved, it will include a higher
interest rate, since the bank could loaning to Heartland as a risky
venture. The main objective of any loan officer is to ensure that the
loan made can be repaid, plain and simple. However, this requires an
understanding of four major areas of financial measures; financial
leverage (long-term), liquidity potential (short-term), asset
utilization (efficiency), and of course profitability.
From the descriptions of performance in these areas in the previous
question, Heartland has proven to be an under-performer in the areas
of liquidity, financial leverage, and profitability. Perhaps the most
difficult thing for the bank to accept would be the liability
structure Heartland already has; they are quite heavily focused on
debt and therefore have many and/or large creditors. This combined
with their extremely low TImes-interest-earned (about half the
industry average) means that if Heartland needs to liquidize there
will be many other people in line to collect their loans. In addition,
Heartland's trend towards debt means there is a potential for even
more creditors in the future!
For these reasons the bank will not finance the loan for Heartland.
This should hopefully give you an understanding of how to use a set of
standard ratios to compare companies. I would like to thank you again
for requesting that I answer your question specifically :)
Cheers!
answerguru-ga |
Request for Answer Clarification by
thanksmate-ga
on
23 Nov 2003 11:29 PST
Hi, Before I can get to this question, the last question
http://answers.google.com/answers/threadview?id=278522 you answered
for me is ALL wrong. Can you please get the right solutions to me
soon?
|
Clarification of Answer by
answerguru-ga
on
23 Nov 2003 12:10 PST
Hi thanksmate-ga,
Could you please be more specific as to the problem with the other
question - I'm sorry but I've had another look at that question and
I'm not sure what you have found wrong.
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
23 Nov 2003 15:19 PST
I should have defined what the working capital is and said "include
ALL the items below" because then you would have definiteley included
short-term debts, cash and cash equivalents in the calculation and not
relied on Duke's definition that short-term debts, cash and cash
equivalents are not necessarily current assets or liablities with
respect to working capital and current assets. So please include Loans
and Notes Payable (current liability Coca-Cola), Short-term Borrowings
(current liability PepsiCo) and Short-term Investments (current asset
PepsiCo) in the calculations and your discussions.
I will go through this question tomorrow and will post another one for
you the day after.
Thank you!
|
Clarification of Answer by
answerguru-ga
on
23 Nov 2003 23:46 PST
Hi thanksmate,
I've adjusted the working capital question as you've requested to meet
the alternate definition of working capital. My revised answer has
been posted as a clarification in the original thread:
http://answers.google.com/answers/threadview?id=278522
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
25 Nov 2003 01:45 PST
I'm finding this service very convenient and such a pleasure to use
because of you :) Thanks mate!
|
Clarification of Answer by
answerguru-ga
on
25 Nov 2003 06:39 PST
No problem at all :)
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
28 Nov 2003 08:47 PST
Hi answerguru,
I just found out that out of the 10 computations in this question only
3 of your answers are correct.
Can you please re-do this question and re-post as soon as possible.
(I would really appreciate the corrections soon and if you can get to
this in a timely manner I will surely make up for it in your next tip)
Thanks.
PS: I don't know which 3 are correct - but I will look into it if I
have time, which unfortunately I don't think I will have, so I'm
counting on you :)
|
Clarification of Answer by
answerguru-ga
on
28 Nov 2003 09:00 PST
Hi thanksmate,
I'm quite surprised to hear you say that so many of the calculations
in this question are incorrect - after all they are very simple. The
only thing I can think of that may hav caused a problem is a
difference in the definition of certain ratios. I have checked over
all of my answers according to the definitions provided and they are
all correct. How did you come to the conclusion that my answers were
incorrect? You may want to clarify the definitions with this
person/source so I can adjust them appropriately.
answerguru-ga
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
29 Nov 2003 10:43 PST
Thanks for the prompt reply.
Following are my definitions and some calculations that I believe to be correct.
1. Current Ratio:
I think your definition and calculation are correct
2. Quick Ratio:
(Cash + Marketable Securities + Current Receivables) / Current Liabilities
(1135 + 1250 + 15650) / 33945 = 0.5313
3. Accounts Ratio Turnover:
Net Credit Sales / AVerage Accounts Receivable = 542750 / [(15650 +
12380) / 2] = 38.73
4. Inventory Turnover:
Cost of Goods Sold / AVerage Inventory = 435650 / [( 12680 + 15870) / 2] = 30.52
5. Debt-to-equity ratio:
I think your definition and calculation are correct
6. Times Interest Earned:
I think your definition and calculation are correct
7, 8, 9.
At these URLs is a worked example of solving for the Rate on Assets,
Return on Sales and Return on Assets ratios and the definitions I
would like you to use:
http://www.gnaunited.com/modules/My_Uploads/user_folders/thanksmate/rate.jpg
http://www.gnaunited.com/modules/My_Uploads/user_folders/thanksmate/income-statement.jpg
http://www.gnaunited.com/modules/My_Uploads/user_folders/thanksmate/balance-sheet.jpg
10. The definition for "Return on common stockholders? equity" is:
Return on common stockholders? equity = (Net Income - Preferred
Dividends) / (AVerage common stockholder's equity)
Thank you so much!
|
Clarification of Answer by
answerguru-ga
on
29 Nov 2003 13:11 PST
Hi thanksmate,
Yes I see that your definitions are focused around averages...
#2,3,4: Your answers are correct given the alternate definitions
The following need to be revised like this:
Return on Assets = (Net income + Interest expense, net of tax)/Average Total Assets
= (19095 + 9275*0.6)/0.5*(279525 + 270095)
= 24660 / 274810
= 0.0897 = 8.97%
Return on Sales = (Net income + Interest expense, net of tax)/Net Sales
= (19095 + 9275*0.6)/ 542750
= 0.0454 = 4.54%
Return on common stockholders? equity = (Net Income - Preferred
Dividends) / (AVerage common stockholder's equity)
= (19095 - 0) / 0.5*(165580 + 158485)
= 19095 / 162032.50
= 0.1178 = 11.78%
Hopefully that clears up any conflicting calculations :)
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
30 Nov 2003 03:15 PST
I hope it's okay now. Thanks.
And the Asset Turnover Ratio?
I think it is: Net Sales / Average Assets
Also, a discussion with the correct values would be very appreciated,
it's up to you whether you do one or not - I will still be satisfied
either way.
Do you answer questions in all of answers.google.com or only in the
business/science sections? (I'm working 3 (am not kidding) full-time
jobs now and could use help in several different areas - mostly simple
research that would require at the most only a couple of hours per
question)
|
Clarification of Answer by
answerguru-ga
on
30 Nov 2003 06:13 PST
Hi thanksmate,
All of the revised calculations have the same commentary as the
original - since the differences were very small their relative
comparisons to the industry are the same. You should be fine just
using the original commentary.
As far as the types of questions I answer, if you look at my profile
you will get an idea of what I have answered in the past. Typically
all researchers can answer any question they feel qualified to answer.
If you would like me to answer your questions, you can always do what
you've been doing (ie. specifying that only I should answer it for 24
hours) and if I don't answer it then that either means I don't have
time to do so or don't feel it is within my area of expertise :)
answerguru-ga
|
Request for Answer Clarification by
thanksmate-ga
on
30 Nov 2003 10:42 PST
Great! I'm satisfied.
See you around.
Thanksmate :)
|
Clarification of Answer by
answerguru-ga
on
30 Nov 2003 11:04 PST
No problem...
answerguru-ga
|
