Efficiency of asset usage


You obtained the following ratios for ABC Co for 2013:

ABC Co

Ratios

Industry

Current Ratio

2.1x

2.7x

Inventory Turnover

9.7x

7x

Days Sales Outstanding

18 days

32 days

Fixed Assets Turnover

6.8x

13x

Total Asset Turnover

3.3x

2.6x

Profit Margin

3.5%

3.5%

Time interest earned

5.0x

5x

Anwer questions (a) to (e)

a) You also understand that ABC Co cost of goods sold is 92% of sales and that it paid a total of $148 (thousand) in interest. The tax rate is 40%. Provide ABC Co income statement for 2013.

b) Complete the Balance Sheet for ABC Co as of December 31, 2013 (in thousands)

Assets



Cash and Equivalents

-


Accounts Receivables

-


Inventories

-


Total Current Assets

-


Net plant and equipment

-


Total Assets

-


Liabilities and Equity


Accounts Payable

-

Notes Payable

160

Accruals

480

Current Liabilities

-

Long term bonds

-

Total Liabilities

-

Common stock

240

Retained earnings

520

Common Equity

-

Total Liabilities and Equity

-





c) Compute ABC Co RoA and RoE. Compare to Industry RoA 11%, RoE 25%

d) Provide the DuPont Analysis with comments. Note that the industry Debt to Asset ratio is 50%. Show your calculations.

e) Finally using c) d) and the table above, comment on the company's:

i. Liquidity (define)

ii. Adequacy of its credit policy

iii. Efficiency of asset usage (should the company increase inventories, fixed assets)

iv. Adequacy of leverage level.

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Finance Basics: Efficiency of asset usage
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