Question 1

What other sources of information will a financial statement analyst find useful other than the financial statements and related notes?

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Question 2

Define cash flow adequacy and the importance of this ratio to credit rating agencies.

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Question 3

Financial ratio data is listed below for Gallery of Dreams.Construct a list of strengths and weaknesses for the firm after analyzing the ratios.
 Gallery of Dreams
Ratios
\(\begin{array}{lrrrr}
\text { Ratio }&\text { Industry }&2015&2014&2013\\hline
\text { Current } & 2.50 \mathrm{x} & 4.48 \mathrm{x} & 4.06 \mathrm{x} & 3.48 \mathrm{x} \
\text { Quick } & 0.80 \mathrm{x} & 1.47 \mathrm{x} & 1.18 \mathrm{x} & 0.96 \mathrm{x} \
\text { Average collection period } & 11 \text { days } & 16 \text { days } & 15 \text { days } & 9 \text { days } \
\text { Inventory turnover } & 2.30 \mathrm{x} & 1.19 \mathrm{x} & 1.24 \mathrm{x} & 1.37 \mathrm{x}\
\text { Days payable outstanding } & 15 \text { days } & 11 \text { days } & 12 \text { days } & 8 \text { days } \
\text { Fixed asset turnover } & 17.50 \mathrm{x} & 9.74 \mathrm{x} & 9.09 \mathrm{x} & 8.85 \mathrm{x} \
\text { Total asset turnover } & 2.80 \mathrm{x} & 1.50 \mathrm{x} & 1.67 \mathrm{x} & 1.82 \mathrm{x} \
\text { Debt ratio } & 62.00 \% & 29.47 \% & 34.04 \% & 39.17 \%\\text { Long term debt to }\
\text { total capitalization } & 25.53 \% & 14.09 \% & 18.91 \% & 22.33 \% \
\text { Times interest earned } & 9.93 \mathrm{x} & 22.02 \mathrm{x} & 19.00 \mathrm{x} & 14.23 \mathrm{x} \
\text { Fixed charge coverage } & 8.69 \mathrm{x} & 4.59 \mathrm{x} & 4.47 \mathrm{x} & 4.25 \mathrm{x} \
\text { Gross profit margin } & 31.10 \% & 59.21 \% & 59.39 \% & 58.52 \% \
\text { Operating profit margin } & 8.06 \% & 22.05 \% & 21.86 \% & 20.52 \%\
\text { Net profit margin } & 4.32 \% & 11.89 \% & 11.00 \% & 10.97 \% \
\text { Return on investment } & 9.21 \% & 17.97 \% & 18.28 \% & 18.35 \% \
\text { Return on equity } & 11.34 \% & 24.14 \% & 27.51 \% & 29.88 \%
\end{array}\)

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Question 4

Using the financial ratios calculated from the 2015 annual report of PVC Pipes, assess the short-term liquidity, operating efficiency, capital structure and long-term solvency and profitability of the firm.
 \(\begin{array}{lrr}\text { Ratio }&2015&2014\\hline
\text { Current } & 1.52 \mathrm{x} & 1.48 \mathrm{x} \
\text { Quick } & 1.01 \mathrm{x} & 0.98 \mathrm{x} \
\text { Average collection period } & 65 \text { days } & 58 \text { days } \
\text { Days inventory held } & 36 \text { days } & 28 \text { days } \
\text { Days payable outstanding } & 61 \text { days } & 47 \text { days } \
\text { Cash conversion cycle } & 40 \text { days } & 39 \text { days } \
\text { Fixed asset turnover } & 4.91 \mathrm{x} & 4.02 \mathrm{x} \
\text { Total asset turnover } & 1.70 \mathrm{x} & 1.43 \mathrm{x} \
\text { Debt ratio } & 67.10 \% & 63.08 \%\\text { Long Term debt to }\
\text { total capitalization } & 46.82 \% & 42.51 \% \
\text { Times interest earned } & (5.10 \mathrm{x}) & 1.65 \mathrm{x} \
\text { Fixed charge coverage } & (2.34 \mathrm{x}) & 1.40 \mathrm{x} \
\text { Cash flow adequacy } & 0.32 \mathrm{x} & 0.87 \mathrm{x} \
\text { Gross profit margin } & 10.10 \% & 12.81 \% \
\text { Operating profit margin } & (5.93 \%) & 2.75 \%\
\text { Net profit margin } & (4.98 \%) & 0.91 \% \
\text { Cash flow margin } & 3.84 \% & 7.00 \% \
\text { Return on investment } & (8.63 \%) & 1.28 \% \
\text { Return on equity } & (25.49 \%) & 3.51 \% \
\text { Cash return on asstes } & 6.90 \% &9.10 \%
\end{array}\)

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Question 5

Using the ratios and information given below for PepCo Company, analyze the short-term liquidity of the firm. $\begin{array}{lll}&2015&2014\
\text { Current ratio } & .86 & .80 \
\text { Quick ratio } & .65 & .61 \
\text { Cash flow liquidity ratio } & .69 & .62\
\text { Average collection period } & 32 \text { days } & \text { 30 days } \
\text { Days inventory held } & 74 \text { days } & 74 \text { days } \
\text { Days payable outstanding } & 157 \text { days } & 163 \text { days }\
\text { Cash conversion cycle } & \text { (51 days) } & \text { (59 days) } \
\text { Cash flow from operations (in millions) } & \$ 2,508 & \$ 2,232 \
\text { Net sales (in millions) } & \$ 13,957 & \$ 13,074
\end{array}$

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Question 6

List and discuss the ratios that make up the calculation of the cash conversion cycle.

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Question 7

Explain the key items of interest to the following groups of people when completing a financial statement analysis: investors, creditors and management.

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Question 8

The following ratios have been calculated for Hi-Tech Toys.Analyze the capital structure, long-term solvency, and profitability of Hi-Tech Toys.

$\begin{array}{lrr} \text { Financial ratios }&2015&2014\ \hline\text { Leverage }\ \text { Debt ratio (\%) } & 65.3 & 57.2 \ \text { Long-term debt to total capital (\%) } & 46.8 & 17.6 \ \text { Times interest earned (times) } & (1.5) & 3.9 \ \text { Cash interest coverage (times) } & 4.1 & 9.2 \ \text { Fixed charge coverage (times) } & (0.4) & 2.8 \ \text { Cash flow adequacy (times) } & 0.3 & 0.8\\text { Profitability }\ \text { Gross profit margin (\%) } & 54.7 & 58.6 \ \text { Operating profit margin (\%) } & (2.3) & 7.4 \ \text { Net profit margin (\%) } & (3.4) & 4.7 \ \text { Cash flow margin (\%) } & 4.3 & 8.9 \ \text { Return on assets (\%) } & (3.1) & 3.2 \ \text { Return on equity (\%) } & (10.7) & (9.9) \ \text { Cash return on assets (\%) } & 3.8 & 8.4 \end{array}$

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Question 9

The following ratios have been calculated for the Solar Tech Company.Analyze the profitability of Solar Tech Company. $\begin{array}{lcc}&2015&2014\
\text { Gross profit margin } & 37.0 \% & 42.5 \% \
\text { Operating profit margin } & 4.7 \% & 21.7 \% \
\text { Net profit margin } & 1.3 \% & 17.2 \% \
\text { Cash flow margin } & 20.4 \% & 25.9 \%
\end{array}$

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Question 10

Explain the difference between the current ratio and the cash flow liquidity ratio.

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Question 11

The following categories of ratios are used in financial statement analysis:
a.Liquidity
b.Operating efficiency (also referred to as Activity)
c.Leverage
d.Profitability
e.Market measures
Classify the following ratios according to the above categories:
(1) Dividend payout
(2) Fixed charge coverage
(3) Cash flow margin
(4) Days inventory held
(5) Times interest earned
(6) Net profit margin
(7) Earnings per share
(8) Fixed asset turnover
(9) Total asset turnover
(10) Current ratio

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Question 12

Using the ratios and information given below for SportsOutlet.com, analyze the short-term liquidity and operating efficiency of the firm. $\begin{array}{lll}&2015&2014\
\text { Current ratio } & 1.50 & 1.35 \
\text { Quick ratio } & 1.15 & 1.08 \
\text { Cash flow liquidity ratio } & 1.39 & 1.32\
\text { Average collection period } & 10 \text { days } & 7 \text { days } \
\text { Days inventory held } & 35 \text { days } & 28 \text { days } \
\text { Days payable outstanding } & 86 \text { days } & 79 \text { days }\
\text { Cash conversion cycle } & (41 \text { days) } & \text { (44 days) } \
\text { Fixed asset turnover } & 27.36 \text { times } & 22.14 \text { times } \
\text { Total asset tumover } & 1.93 \text { times } & 2.21 \text { times }\
\text { Cash flow from operations (in millions) } & \$ 523 & \$ 376 \
\text { Net sales (in millions) } & \$ 6,743 & \$ 5,187
\end{array}$

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Question 13

List and define the five categories of ratios generally used in financial statement analysis.

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Question 14

The following ratios have been calculated for Wholesale Appliances, Inc.Analyze the capital structure and long-term solvency of Wholesale Appliances, Inc.
2015------2014
 $\begin{array}{ll}
\text { Debt ratio (\%) } & 77.8 &90.3\
\text { Long-term debt to total capital (\%) } & 29.8&66.1\
Times interest earned (times)&(2.0)&(2.8)\
\text { Cash interest coverage (times) }&4.6&4.1\\text { Fixed charge coverage (times) }&(0.4)&(1.0)\
\text { Cash flow adequacy (times) }&0.2&0.3
\end{array}$

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Question 15

Using the following information for Tiger Inc.calculate earnings per share, the price-to earnings ratio, dividend payout and dividend yield for the firm.Analyze these market ratios. $\begin{array}{ll}&2015&2014\
\text { Net income }&\$ 960 \text { million } & \$ 854 \text { million } \
\text { Shares of common stock outstanding }&420 \text { million } & 419 \text { million } \
\text { Dividends per share }&\$ 1.75 & \$ 1.60 \
\text { Market price per share }&\$ 56 & \$ 50
\end{array}$

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Quiz 5: The Analysis of Financial Statements

What other sources of information will a financial statement analyst find useful other than the financial statements and related notes?

Define cash flow adequacy and the importance of this ratio to credit rating agencies.

List and discuss the ratios that make up the calculation of the cash conversion cycle.

Explain the key items of interest to the following groups of people when completing a financial statement analysis: investors, creditors and management.

Explain the difference between the current ratio and the cash flow liquidity ratio.

List and define the five categories of ratios generally used in financial statement analysis.