Question

Help on my Finance homework please!

Integrative: Complete ratio analysis Given the following financial statements, historical ratios, and industry averages, calculate Sterling Company’s financial ratios for the most recent year. (Assume a 365-day year.)

Sterling Company Income Statement for the Year Ended December 31, 2019

Sales revenue $10,000,000

Less: Cost of goods sold 7,500,000      

Gross profits $ 2,500,000

Less: Operating expenses       

Selling expense $ 300,000       

General and administrative expenses 650,000       

Lease expense 50,000       

Depreciation expense 200,000             

Total operating expense $  1,200,000       

Operating profits $  1,300,000

Less: Interest expense 200,000       

Net profits before taxes $  1,100,000

Less: Taxes (rate = 21%) 231,000       

Net profits after taxes $     869,000

Less: Preferred stock dividends 50,000       

Earnings available for common stockholders $     819,000

Earnings per share (EPS) $4.10

Sterling Company Balance Sheet December 31, 2019

Assets Liabilities and Stockholders’ Equity

Cash $ 200,000 Accounts payablea $ 900,000

Marketable securities 50,000 Notes payable 200,000

Accounts receivable 800,000 Accruals 100,000

Inventories 950,000 Total current liabilities $ 1,200,000       

Total current assets $ 2,000,000   Long-term debt (includes financial leases) $ 3,000,000

Gross fixed assets (at cost) $12,000,000

Less: Accumulated depreciation 3,000,000 Preferred stock (25,000 shares, $2 dividend) $ 1,000,000       

Net fixed assets $ 9,000,000

Other assets 1,000,000 Common stock (200,000 shares at $3 par)b 600,000       

Total assets $12,000,000 Paid-in capital in excess of par value 5,200,000

Retained earnings 1,000,000       

Total stockholders’ equity $ 7,800,000

Total liabilities and stockholders’ equity $12,000,000

Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt, profitability, and market.

Historical and Industry Average Ratios for Sterling Company

Ratio Actual 2017 Actual 2018 Industry average, 2019

Current ratio 1.40 1.55 1.85  

Quick ratio 1.00   0.92 1.05  

Inventory turnover 9.52 9.21 8.60  

Average collection period 45.6 days 36.9 days 35.5 days

Average payment period 59.3 days 61.6 days 46.4 days

Total asset turnover 0.74 0.80 0.74  

Debt ratio 0.20 0.20 0.30  

Times interest earned ratio 8.2 7.3 8.0    

Fixed-payment coverage ratio 4.5 4.2 4.2    

Gross profit margin 0.30 0.27 0.25  

Operating profit margin 0.12 0.12 0.10  

Net profit margin 0.062 0.062 0.053

Return on total assets (ROA)   0.045 0.050 0.040

Return on common equity (ROE)   0.061 0.067 0.066

Earnings per share (EPS) $1.75 $2.20 $1.50  

Price/earnings (P/E) ratio 12.0 10.5 11.2    

Market/book (M/B) ratio 1.20 1.05 1.10  

Answer 1