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Brewster

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  Page | 1  Ratios -  Industry averages  The president of Brewster Company has been concerned about its operating performance and financial strength. She has obtained, from a trade association, the averages of certain ratios for the industry. She gives you these ratios and the company’s most recent financial statements (in thousands of dollar). The balance sheet amounts were about that same at the beginning of the year as they are now. Brewster Company, Balance Sheet as of December 31, 19X6 Assets Equities Cash $ 860 Account Payables $ 975 Accounts receivable 3,210 Accrued Expenses 120 Inventory 2,840 Taxes Payable 468 Total current assets $ 6,910 Total current liabilities $ 1,563 Plant and equipment, net 7,000 Bonds Payable, due 19X9 6,300 Common Stock, no par 4,287 Retained earnings 1,850 Total assets $ 14,000 Total equities $ 14,000  Page | 2 Brewster Company, Income Statement for 19X6 Sales $ 11,800 Cost of goods sold 7,350 Gross profit $ 4,450 Operating Expenses, including $650 depreciation 2,110 Operating Profit $ 2,340 Interest Expenses 485 Income Before Taxes $ 1,855 Income Taxes at 40% 742  Net Income $ 1,113 Brewster has 95,000 shares of common stocks outstanding, which gives earnings per share of $ 11.72 ($ 1,113,000/95,000). Dividends are 5$ per share and the market price of the stock is $120. Average ratios for the industry are as follows: Current Ratio 3.8 to 1 Return on equity 17.5% Quick Ratio 1.9 to 1 Price-earnings ratio 12.3 Accounts receivable turn over 4.8 times Dividend Yields 3.9% Inventory turnover 3.6 times Payout ratio 38.0% Return on sales 7.6 % Debt Ratio 50.0% Return on Assets 17.6% Time interest earned 6 times Cash flow to total debt 25.0%  Page | 3 Required 1. Compute the ratios shown above for Brewster Company Prepare comments to the president indicating areas of apparent strength and weaknesses for Brewster Company in relation to the industry.  Page | 4 Industry Average 1. Current Ratio = Current Assets = 6,910 = 4.42 VS. 3.8  Current Liabilities 1,563    Strength- higher than industry, better ability to pay current debts. 2. Quick Ratio = Cash + receivables + marketable securities Current Liabilities = 860 + 3,210 = 4,070 = 2.61 VS. 1.9 1,563 1,563    Strength- higher than industry, better ability to pay current debts. 3. Accounts Receivables Turnover = Net Credit Sales = 11,800 = 3.68 VS. 4.8 Average Account Receivable 3,210    Weakness- slower in generating sales compared to industry 4. Inventory Turnover = Sales = 11,800 = 4.16 Inventory 2,840 OR Cost of Good sold = 7,350 = 2.59 VS. 3.60  Average Inventory 2,840    Weakness- slower in converting inventories to sales 5. Return on Sales = net income (before interest and tax) Sales = 1,855 + 485 = 2,340 = .20 or 20% VS. 7.6 11,800 11,800    Strength- able to generate more income from its sales (higher  profitability rate compared to peers- more efficient in producing sales either due to lower cost or higher sales price imposed to market) 6. Return on Assets = Net Income = 1,113 = 0.08 or 8% VS. 17.6% Total Assets 14,000

Mr. Siva Kishan

Jul 30, 2017
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