Book- Introduction to Corporate Finance 3rd edition - Chapter 2 Mini Case -
you have been hired as a financial analyst by First Citizens Bank. One of your first job assignments it to analyze the present financieal condition of Bradley Stores, Inc. You are provided with the following 2012 balance sheet and income statement information for Bradley Stores. In addition you are told that Bradley Stores has 10,000,000 shares of common stock outstanding currently trading at $9 per share, and has made annual purchases of $210,000,000. Your assignment calls for you to calculate certain financial ratios and to compare these calculated ratios with the industry average ratios that are provided. You are also told to base your analysis on five categories of ratios (a) liquidity ratios, (b) activity ratios, (c) debt ratios, (d) profitability ratios,and (e) market ratios.
Balance sheet
Cash $5,000 Accounts payable $15,000
Accounts receivable 20,000 Notes payable 20,000
Inventory 40,000 Total current liabilities 35,000
Total current assets 65,000 Long term debt 10,000
net fixed assets 135,000 stockholder equity 65,000
total assets 200,000 total liabilities and equity 200,000
net sales (all credit) 300,000
less cost of goods sold 250,000
earnings before interest and taxes 50,000
less interest 40,000
earnings before taxes 10,000
less taxes (40%) 4,000
Net Income 6,000
Industry averages for key ratios
Net profit margin 6.4%
average collection period (365 days) 30 days
debt ratio 50%
p/e ratio 23
inventory turnover ratio 12.0
roe 18%
average payment period (365 days) 20 days
times interest earned ratio 8.5
total asset turnover 1.4
current ratio 1.5
assets to equity ratio 2.0
roa 9%
quick ratio 1.25
fixed asset turover ratio 1.8
Overall, what are Bradley's strong and weak points? knowing that your boss will approve new loans only to companies in a better-than-average financial position, what is your final recommendation (approval or denial of loan)?