A company has the following ratios:
Current ratio - .85
Inventory to Sales Conversion Period – 180 days
Sales to Cash Conversion Period – 40 days
Purchases to Payments Conversion Period - 7 days
The accountant also reports that the gross profit margin is 15% and the next profit margin is 3%.
Now you are being provided with this additional information on the company.The company also has a bank line of credit that allows the company to borrow any shortfall it might have in cash. Interest on the loan is 10%. Assume the loan remained constant throughout the year.
The company has $1,000,000 of equity and $120,000 in retained earnings at the end of the year.
Sales in the most recent year were $2,500,000.
Ignore income tax for purposes of this problem.
1. Based on all of the above information, will this company have a good return on equity or a poor return on equity?
2. Build a balance sheet and income statement financial model to prove your answer.