Assignment: Ratio Analysis
1. As of the fiscal year end of April 9, 2011, the Balance Sheet of The Real Mackay Inc., a large retailer of luxury beers, revealed the following:
Cash $1,000,000
Accounts Receivable $300,000
Inventory $1,080,000
Supplies $500,000
Prepaid Expenses $390,000
Current Assets $3,270,000
Current Liabilities $1,630,000
Credit Sales $3,750,000
Cost of Goods Sold $12,000,000
Beginning Inventory $900,000
Credit terms: 2/10 net 30 (this is consistent with industry norms)
Industry Averages:
ROA 7%
Current ratio 2:1
Quick ratio .9:1
Gross Profit Margin .7 or 70%
Inventory turnover 11.5 times (this industry uses COGS when assessinginventory turnover)
Comment on the liquidity position of The Real Mackay using the appropriate ratios and guidelines. Make sure to discuss both strengths and weaknesses of the liquidity position, and provide as much detail as possible.
2. You have been provided with the following information about Straight Company and Curly Company, both of which manufacture and market similar hair care products.
Straight Co. Curly Co.
Sales $ 16,000,000 $18,000,000
Cost of Goods Sold $ 10,000,000 $ 9,000,000
Net Income $ 2,000,000 $ 1,500,000
Total Shareholder's Equity $ 20,000,000 $10,000,000
EPS $2.75 $2.89
Dividend Yield 9% 8.3%
Current ratio 2.7:1 3.1:1
Furthermore, you have been able to obtain the following industry averages for firms competing directly with Straight Company and Curly Company.
Gross Profit Margin 49%
Net Profit Margin 13%
ROI 9%
Current ratio 2.7:1
Analyze and suggest reasons for the different profitability ratios/positions of Straight Co. and Curly Co.
Ratio Formulas
[Dividends per Share of Common Stock / Price per Share of Common Stock] x 100%
Current Assets / Current Liabilities
Current Liabilities + Long Term Liabilities / Total Net Worth
[Gross Profit / Sales] x 100%
(Net Income - Preferred Dividends) / # shares of Common Stock
[Current Assets - (Inventories + Supplies + Prepaid Expenses)] / Current Liabilities
Long Term Debt / Total Shareholders' Equity
Annual (Credit) Sales / (Average) Accounts Receivable
[Net Profit / Sales] x 100%
Market Price per Share of Common Stock / EPS
Cost of Goods Sold / Average Inventory
[Net Income / Total Tangible Assets] x 100%
Dividends per Share of Common Stock / EPS
(Average) Accounts Receivable x 365 days / Annual (Credit) Sales
[Net Income / Total Shareholders' Equity] x 100%
Earnings before Interest and Taxes / Total Annual Interest Charges
Current Assets - Current Liabilities.