Given the following balance sheet, income statement, historical ratios and industry averages, calculate the financial ratios listed in the table below for ABC Company for 2006. Income Statement ABC Company For the Year Ended December 31,2006 Sales Revenue $2,080,976 Less Cost of Goods Sold 1,701,000 Gross Profits $379,976 Less Operating Expenses 273,846 Operating Profits $106,130 Less Interest Expense 19,296 Net Profits Before Taxes $86,834 Less Taxes (40%) 34,810 Net Profits After Taxes $52,024 Balance Sheet ABC Company December 31, 2006 Assets Cash $95,000 Accounts receivable 237,0000 Inventories 243,000 Total current assets $575,000 Gross fixed assets 500,000 Less Accumulated depreciation 75,000 Net fixed assets $425,000 Total assets $1,000,000 Liabilities and stockholders' equity Current liabilities Accounts payable $89,000 Notes payable 169,000 Accruals 87,000 Total current liabilities $345,000 Long-term debt 188,000 Total liabilities $533,000 Stockholders' equity Common Stock 255,000 Retained earnings 212,000 Total stockholders' equity $467,000 Total liabilities and stockholders' equity $1,000,000 Historical and Industry Average Ratios ABC Company Ratio 2004 2005 2006 Industry 2006 Current Ratio 1.6 1.7 1.6 Quick Ratio 0.9 1 0.9 Inventory Turnover 8.1 9.3 8.4 Average Collection Period 33 days 37 days 39 days Total Asset Turnover 2.3 2.2 2.2 Debt Ratio 60% 56% 58% Times Interest Earned 2.5 3.5 2.3 Gross Profit Margin 21% 19.70% 20.40% Operating Profit Margin 4.70% 4.80% 4.70% Net Profit Margin 1.80% 1.60% 1.40% Return on total assets 4.10% 3.50% 3.08% Return on Equity 10.30% 7.90% 7.30% Given the information in Problem 1 above, evaluate the company’s performance both over time (time series analysis) and relative to the industry average (cross section analysis). Break your analysis into an evaluation of the firm’s liquidity, activity, debt, and profitability.
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