PROBLEMS

Questions
Calculate / Discuss
a) WC & CR /
relative Liquidity.
b) DAR, TIE /
Solvency
c) ROA, PMR /
Relative
Profitability
d) DAR after
adjusting for
leases /
Implications

P13-3A
Questions
a) Calculate
1) PMR
2) GPR
3) TATO
4) EPS
5) PE
6) POR
7) DAR
b) Improvement in
financial position
and operating
results

20%

14%

BYP13 - 7
J. Putnam Corporation

2014

2013

Current Ratio

3.1

2.1

= CA CL

Asset Turnover Ratio

2.8

2.2

= Sales
Avg(TA)

Cash Debt Coverage Ratio

0.1

0.2

= CFO
Avg(TL)

Net Income Growth

+ 32% -8%

EPS

$3.30 $2.50

b) Discuss implications of the ratios for the lending decisions.

Does the information paint a favorable picture?
Are the ratios relevant to the decision?

BYP13 - 7
J. Putnam Corporation

2014

2013

Current Ratio

3.1

2.1

Asset Turnover Ratio

2.8

2.2

Cash Debt Coverage Ratio

0.1

0.2

Net Income Growth

+ 32%

- 8%

EPS

$3.30

$2.50

3 other ratios that you would want to calculate for this company?

Putnam

2014

2013

CR

3.1

2.1

TATO

2.8

2.2

CDCR

0.1

0.2

+ 32%

- 8%

NI
EPS

$3.30 $2.50

Discuss implications
of the ratios for the
lending decisions.
Does the
information
paint a favorable
picture?
Are the ratios
relevant to the
decision?

Putnam

2014

2013

CR

3.1

2.1

TATO

2.8

2.2

CDCR

0.1

0.2

+ 32%

- 8%

NI
EPS

$3.30 $2.50

Discuss implications
of the ratios for the
lending decisions.
Does the
information
paint a favorable
picture?
Are the ratios
relevant to the
decision?

Useful Ratios for Analysis Of Income Statement Information

Multi-Step Income Statement
Net Sales (Last year 1,818)

Key I/S Ratios

Sales Growth Rate

10%

COGS as % of Sales = 11002000

55%

G.P. Margin = 9002000

45%

OE as % of Sales = 4002000

25%

Degree of Operating Risk (DOR)

= GP OP = 900 500

1.8x

O.P. Margin = 5002000

25%

Other Items as % of Sales=402000

2%

EBIT Margin = 5402000

27%

-180

Times Interest Earned = 540180

3.0x

EBT

360

Degree of Financial Risk (DFR) =

EBIT/OP EBT = 500 360

1.39x

Tax Expenses

144

Effective Tax Rate = 144360

40%

Net Profit

216

Net Profit Margin = 2162000

10.8%

Pay out Ratio =72 216

33%

Degree of Total Risk (DTR) = DOR *

DFR = 1.8 * 1.39 = 900 360

2.5x

Less COGS
Gross Profit
Less Operating Exp

2,000
-1,100
900
-400

(Depreciation for the year

100)
Operating Profit
Add Other Income / Losses
EBIT
Less Interest Expenses

500
40
540

Dividend Paid

72

Increase in RE

144

Working Capital cycle for the two firms

Data

Company X

Company Y

Current Ratio
Quick Ratio

3.3
2

3.5
2

Days of Inventory outstanding

Days of Sales Outstanding
Days of Payables Outstanding

73
73
66

63
60
42

Operating Cycle
Cash Conversion Cycle

146
80

123
81

Compare these firms on their Liquidity paramter

Need for Working capital

117

The Operating Cycle & the Cash Cycle

Raw material
purchased

Finished goods sold

Cash
received

Order
Stock
Placed Arrives

Inventory period

A/R or
Avg. Collection period

Accounts Payable Period

Firm receives invoice

Time

Cash paid for materials

Operating cycle or
Gross WC cycle
= Inv Days + AR Days

Cash cycle or
Net WC cycle or
Financing Period = Inv +
AR AP Days

Balance Sheet

2016

2015

Total Assets

1,600

1,200

Fixed Assets (Gross

Block)

1,000

Less A/D (Depr. = 100)

-300

700
-200

Fixed Assets (Net Block)

700

500

Investments

100

100

Current Assets

800

600

Avg

Balance Sheet

1,400
850
-150
600

700

Inventory

250

200

225

A/R

300

250

275

Cash & CE

160

100

Current Liabilities

400

350

A/P

140

100

Short Term Loan

110

150

Long Term Liability

Long Term Loans
Shareholders Equity

200

120

150

80

60

1,000

700

850

2016

2015

Quick Assets

550

400

Total
Borrowings

190

210

200

Total Liabilities

600

500

550

1190

910

1050

Capital
Employed

Avg

Multi-Step Income Statement

Balance Sheet

2016

Net Sales (Last year

1,818)

2,000

Total Assets

1,600

Less COGS

1,100

Gross Profit
Less Operating Exp
Operating Profit
Add Other Income /
Losses
EBIT
Less Interest Expenses

900
-400
500
40
540
-180

EBT

360

Tax Expenses

144

Net Profit

216

Dividend Paid

72

Increase in RE

144

2015

Avg

1,200

1,400

Fixed Assets (Gross

Block)

1,000

700

850

Less A/D (Depr. = 100)

-300

-200

-150

Fixed Assets (Net Block)

700

500

600

Investments

100

100

100

Current Assets

800

600

700

Inventory

250

200

225

A/R

300

250

275

Cash & CE

160

100

125

Other CA

90

50

75

Current Liabilities

400

350

A/P

140

100

120

Short Term Loan

110

150

130

Other CL

150

100

125

Long Term Liability

200

150

Long Term Loans

80

60

70

Deferred Tax Liability

120

90

105

1,000

700

Shareholders Equity

Effect of Transactions on Ratios

Transaction

Ratio Formula

(a) Paid suppliers for past purchases.

COGS / Average Inventory

(b) Issued equity shares for cash.

Net Income / Average

Equity

(c) Repaid a secured loan.

Net Sales / Average AR

(d) Purchased machinery for cash.

Long Term Debt / Total

Equity

(e) Issued debentures for cash.

Net Income / Average

Assets

(f) Converted long-term loans to equity

shares.

(CA Inventory Prepaid

Expenses) / CL

(g) Collected from customers for past sales.

Net Profit / Net Sales

(h) Accrued festival bonus to employees.

Net Profit / Weighted

Average Number of Shares

(i) Sold goods for cash.

(CA Inventory Prepaid

Expenses) / CL

(j) Accrued interest expense.

Operating Profit / Net Sales

Transactions

Ratio Formula

(k) Issued bonus shares.

Net Income / Average

Equity

(l) Wrote off an uncollectible debt to provision.

Net Sales / Average AR

(m) Issued debentures in exchange for

equipment.

LT Debt / Total Equity

(n) Entered into a hire purchase for a new

plant.

EBIT / Interest Expenses

(o) Purchased goods on credit.

Net Sales / Average

Assets

(p) Accrued interest on investment in Treasury

bill.

Net Income / Average

Equity

(q) Sold a plant at book value in exchange for

shares.

Net Income / Average

Assets

(r) Transferred cash to a six-month deposit a/c.

(CA Inventory Prepaid

Exp) / CL

(s) Paid principal amounts of price for

instalment purchase of plant.

Net Income / Net Sales

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