Question: Tracking Changes in Net Operating Assets and the Asset Turnover: Regina Company (Medium)
(Based on an analysis by Patricia Fairfield, Georgetown University.)
The Regina Company once marketed a successful line of vacuum cleaners, but then ran into trouble and failed. As you can see from the income statements below, the firm had dramatic sales growth during the 1980s. Using the income statements and balance sheets below, track operating income (after tax), free cash flow, changes in net operating assets, and asset turnovers over the period. Use a tax rate of 39 percent.
a. For 1988, calculate normalized operating income. What does this number tell you about the earnings quality in 1988?
b. What do the changes in asset turnover tell you about earnings quality in each of the years?
c. What detail in the statements raises further red flags?
