(CMA Jun 96 #6) All-Things Inc $\text { Selected Financial Ratios }$

(CMA Jun 96 #6) All-Things Inc.manufactures a variety of consumer products.The company's founders have managed the company for thirty years and are now interested in retiring.Consequently, they are seeking to sell the company.Trial Associates is looking into the acquisition of All-Things and has requested the latest financial statements and selected financial ratios in order to evaluate All-Things' financial stability and operating efficiency.The summary information provided by All-Things is presented below.
All-Things Inc.
Income Statement
For the Year Ended May 31, Year 6
(in thousands)
$\begin{array}{lr}\text { Sales (net) } & \$ 30,500 \\\text { Interest income } & 500 \\\text { Total revenue } & \$ 31.000\\\text { Costs and expenses: } & \\\text { Cost of goods sold } & 17,600 \\\text { Selling and administrative expense } & 3,550 \\\text { Depreciation and amortization expense } &1,890 \\\text { Interest expense } &900 \\\text { Total costs and expenses }&\$23,940\\\text { Income before taxes } & 7,060 \\\text { Income taxes } & 2.900\\\text { Net income }&\$4,160\end{array}$
$\text { Selected Financial Ratios }$
$\begin{array}{llll}&& \text { 5-Year } \\&\text { All-Things } & \text { Industry } & \\ & \text { Year } 4 & \text { Year } 5 & \text { Average }\\\hline\text { Current ratio } & 1.62 & 1.61 & 1.63 \\\text { Acid-test ratio } & .63 & .64 & .68 \\\text { Total asset turnover } & 1.83 & 1.84 & 1.84 \\\text { Inventory turnover } & 3.21 & 3.17 & 3.18 \\\text { Times interest earned } & 8.50 & 8.55 & 8.45 \\\text { Total debt to net worth (Total debt / Total shareholders' equity) } & \mathbf{1 . 0 2} & .86 & \mathbf{1 . 0 3} \\\text { Net profit margin } & 12.1 \% & 13.2 \% & 13.0 \%\end{array}$
$\begin{array}{llll} \text { 5- year}\\ \text {Industy }& \text {All-Things }\\\text { Average } & \text { Yean } 5 & \text { Year } 4\\1.63 & 1.61 & 1.62 & \text { Currentratio}\\.68 & .64 & .63 & \text {Acichtest ratio }\\1.84 & 1.84 & 1.83& \text {Total asset turnover } \\3.18 & 3.17 & 3.21& \text {Inventory turnover } \\8.45 & 8.55 & 8.50 & \text { Times interest earned}\\\mathbf{1 . 0 3} & \mathbf{8 6} & \mathbf{1 . 0 2} & \text {Total debt to net worth (Total debt / Total shareholders' equity) }\\13.0 \% & 13.2 \% & 12.1 \%& \text {Net profit margin }\end{array}$ All-Things Inc.
Comparative Statement of Financial Position
As of May 31
(In thousands)
$\begin{array}{lll}&\text { Year } 6&\text { Year } 7\\\text { Cash } & \$ 400 & \$ 500 \\\text { Marketable securities (at cost) } & 500 & 200 \\\text { Accounts receivable (net) } & 3,200 & 2,900 \\\text { Inventory } &5,8 0 0 & 5,400 \\\text { Total current assets } & \overline{\$ 9,900} & \overline{\$ 9,000} \\\text { Property, plant, and equipment (net) } & 7.100 & 7,000\\\text { Total assets }&\$17,000&\$16,000\\\\\text { Accounts payable } & \$ 3,700 & \$ 3,400 \\\text { Income taxes payable } & 900 & 800 \\\text { Accrued expenses } & 1.700 & 1.400 \\\text { Total current liabilities } & \$ 6,300 & \$ 5,600 \\\text { Long-term debt } &2.000 & 1.800 \\\text { Total liabilities }&\$8,300&\$7,400\\\\\text { Common stock ( } \$ 1 \text { par value) } & 2,700 & 2,700 \\\text { Paid-in-capital in excess of par } & 1,000 & 1,000 \\\text { Retained earnings } & 5,000 & 4,900\\\text { Total shareholders' equity }&\$ 8.700 & \$ 8.600\\\text { Total liabilities and shareholders' equity }&\$ 17.000 & \$ 16.000\end{array}$ Required:
a. Calculate a new set of ratios for the fiscal Year 6 for All-Things Inc. based on the financial statements presented.
b. Briefly explain the analytical use of each of the seven ratios presented, describing what the investors can learn about All-Things Inc.'s financial stability and operating efficiency.
c. Identify two limitations of ratio analysis.