Download Calculate earnings per share for 2014 and 2013.

Accounting
What the Numbers Mean 10e
Demonstration Problem
Chapter 11 – Problem 13
Ratio Analysis – Comprehensive Problem
Problem Definition
•
Presented below are summarized data from the balance sheets and
income statements of Wiper, Inc.:
WIPER, INC.
Condensed Balance Sheets
December 31, 2014, 2013, and 2012
2014
2013
2012
Current assets . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . .
$ 677
2,413
$3,090
$ 891
1,920
$2,811
$ 736
1,719
$2,455
Current liabilities . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . .
Stockholders’ equity. . . . . . . . . .
$ 562
1,521
1,007
$3,090
$ 803
982
1,026
$2,811
$ 710
827
918
$2,455
Problem Definition
WIPER, INC.
Selected Income Statement Data and Other Data
For the Years Ended December 31, 2014 and 2013
(in millions)
Income statement data:
2014
2013
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,050
$2,913
Operating income . . . . . . . . . . . . . . . . . . . . . . . . .
296
310
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . .
84
65
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
192
187
Other data:
Average number of common shares outstanding. . . . .
41.3
46.7
Total dividends paid . . . . . . . . . . . . . . . . . . . . . . .
$ 50.0
$ 52.3
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income
and average total assets, for 2014 and 2013. Show
both margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for each
of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?
Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in
part e.
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’
sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state your
opinion about its suitability as an investment for a
young, single professional with funds to invest in
common stock.
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income .
Sales
Average total assets
Sales
Average total assets
2014 ROI =
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050)
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
2013 ROI =
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
2013 ROI = ($187 / $2,913)
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]
= 6.4% margin * 1.106 turnover
Problem Solution
a.
ROI
= Margin x
Turnover
Net income
Net income
Sales
Average total assets
Sales
Average total assets
2014 ROI = ($192 / $3,050) * [$3,050 / (($2,811 + $3,090) / 2)]
= 6.3% margin * 1.034 turnover
= 6.5% ROI
2013 ROI = ($187 / $2,913) * [$2,913 / (($2,455 + $2,811) / 2)]
= 6.4% margin * 1.106 turnover
= 7.1% ROI
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income and
average total assets, for 2014 and 2013. Show both
margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for each
of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?
Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in
part e.
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE =
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2)
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE =
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187 / (($1,026 + $918) / 2)
Problem Solution
b.
ROE = Net income /
Average stockholders’ equity
2014 ROE = $192 / (($1,007 + $1,026) / 2) = 18.9%
2013 ROE = $187 / (($1,026 + $918) / 2) = 19.2%
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income and
average total assets, for 2014 and 2013. Show both
margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for
each of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?
Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in
part e.
Problem Solution
c.
Current assets . . . . . . . . . . . . .
2014
2013
2012
$677
$891
$736
Problem Solution
c.
2014
Current assets . . . . . . . . . . . . . $677
Current liabilities . . . . . . . . . . (562)
2013
2012
$891
(803)
$736
(710)
Problem Solution
c.
2014
Current assets . . . . . . . . . . . . . $677
Current liabilities . . . . . . . . . . (562)
Working capital (CA –CL) . . . $115
2013
2012
$891
(803)
$ 88
$736
(710)
$ 26
Problem Solution
c.
2014
Current assets . . . . . . . . . . . . . $677
Current liabilities . . . . . . . . . . (562)
Working capital (CA –CL) . . . $115
Current ratio (CA / CL) . . . . .
1.2
2013
2012
$891
(803)
$ 88
1.1
$736
(710)
$ 26
1.0
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income and
average total assets, for 2014 and 2013. Show both
margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for each
of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?
Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in
part e.
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS =
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3 = $4.65
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3 = $4.65
2013 EPS =
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187 / 46.7
Problem Solution
d.
EPS = Net income /
Weighted-average number
of shares outstanding
2014 EPS = $192 / 41.3 = $4.65
2013 EPS = $187 / 46.7 = $4.00
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income and
average total assets, for 2014 and 2013. Show both
margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for each
of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at
the end of 2014, what was the market price of the
stock?
Calculate the cash dividend per share for 2014 and the
dividend yield based on the market price calculated in
part e.
Problem Solution
e.
Price/Earnings Ratio =
Market Price /
Earnings Per Share
Problem Solution
e.
13 =
Price/Earnings Ratio =
Market Price /
Earnings Per Share
Problem Solution
e.
13 = $???
Price/Earnings Ratio =
Market Price /
Earnings Per Share
Problem Solution
e.
Price/Earnings Ratio =
Market Price /
Earnings Per Share
13 = $??? / $4.65
Problem Solution
e.
Price/Earnings Ratio =
Market Price /
Earnings Per Share
13 = $??? / $4.65
Market price =
Problem Solution
e.
Price/Earnings Ratio =
Market Price /
Earnings Per Share
13 = $??? / $4.65
Market price = $60.45
Problem Definition
a.
b.
c.
d.
e.
f.
Calculate return on investment, based on net income and
average total assets, for 2014 and 2013. Show both
margin and turnover in your calculation.
Calculate return on equity for 2014 and 2013.
Calculate working capital and the current ratio for each
of the past three years.
Calculate earnings per share for 2014 and 2013.
If Wiper’s stock had a price/earnings ratio of 13 at the
end of 2014, what was the market price of the stock?
Calculate the cash dividend per share for 2014 and
the dividend yield based on the market price
calculated in part e.
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million = $1.21
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million = $1.21
Dividend yield =
Cash dividends per share /
Market price per share
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million = $1.21
Dividend yield =
Cash dividends per share /
Market price per share
$1.21 per share
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million = $1.21
Dividend yield =
Cash dividends per share /
Market price per share
$1.21 per share / $60.45 per share
Problem Solution
f.
Cash dividends per share =
Total cash dividends /
Weighted average shares outstanding
$50 million / 41.3 million = $1.21
Dividend yield =
Cash dividends per share /
Market price per share
$1.21 per share / $60.45 per share = 2%
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’
sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state your
opinion about its suitability as an investment for a
young, single professional with funds to invest in
common stock.
Problem Solution
g.
Dividend payout ratio =
Dividends per share /
Earnings per share
Problem Solution
g.
Dividend payout ratio =
Dividends per share /
Earnings per share
$1.21 per share
Problem Solution
g.
Dividend payout ratio =
Dividends per share /
Earnings per share
$1.21 per share / $4.65 per share
Problem Solution
g.
Dividend payout ratio =
Dividends per share /
Earnings per share
$1.21 per share / $4.65 per share = 26%
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31,
2014, totaled $309 million. Calculate the number of
days’ sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state your
opinion about its suitability as an investment for a
young, single professional with funds to invest in
common stock.
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days = $8.356 million
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days = $8.356 million
Number of days’ sales in accounts receivable =
Accounts receivable / Average days’ sales
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days = $8.356 million
Number of days’ sales in accounts receivable =
Accounts receivable / Average days’ sales
$309 million
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days = $8.356 million
Number of days’ sales in accounts receivable =
Accounts receivable / Average days’ sales
$309 million / $8.356 million
Problem Solution
h.
Average days’ sales =
Annual sales / 365 days
$3,050 million / 365 days = $8.356 million
Number of days’ sales in accounts receivable =
Accounts receivable / Average days’ sales
$309 million / $8.356 million = 37.0 days
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’
sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state your
opinion about its suitability as an investment for a
young, single professional with funds to invest in
common stock.
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio =
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521)
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio =
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982)
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio =
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521)
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007= 207%
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio =
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982)
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982) / $1,026
Problem Solution
i.
Debt ratio = Total liabilities /
(Total liabilities + stockholders’ equity)
12/31/14 debt ratio = ($562 + $1,521) / $3,090 = 67.4%
12/31/13 debt ratio = ($803 + $982) / $2,811 = 63.5%
Debt/equity ratio =
Total liabilities / Total stockholders’ equity
12/31/14 debt/equity ratio = ($562 + $1,521) / $1,007 = 207%
12/31/13 debt/equity ratio = ($803 + $982) / $1,026 = 174%
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’
sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state your
opinion about its suitability as an investment for a
young, single professional with funds to invest in
common stock.
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 =
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84 = 3.5 times
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84 = 3.5 times
For 2013 =
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310 / $65
Problem Solution
j.
Times interest earned =
Operating income / Interest expense
For 2014 = $296 / $84 = 3.5 times
For 2013 = $310 / $65 = 4.8 times
Problem Definition
g.
h.
i.
j.
k.
Calculate the dividend payout ratio for 2014.
Assume that accounts receivable at December 31, 2014,
totaled $309 million. Calculate the number of days’
sales in receivables at that date.
Calculate Wiper’s debt ratio and debt/equity ratio at
December 31, 2014 and 2013.
Calculate the times interest earned ratio for 2014 and
2013.
Review the results of these calculations, evaluate the
profitability and liquidity of this company, and state
your opinion about its suitability as an investment for
a young, single professional with funds to invest in
common stock.
Problem Solution
k. A young, single professional would probably be
more interested in potential growth of capital
rather than current dividend income, and would
probably be willing to invest in a stock that
represented a relatively risky investment. Based
on these criteria, the significant growth in
earnings per share and the relatively high
financial leverage could make this stock an
attractive, though risky, potential investment.
(continued)
Problem Solution
k. The liquidity of the company is relatively low,
based on an “average” current ratio of 1.0.
Without further information about the
composition of current assets and current
liability accounts, it is difficult to assess the
firm’s liquidity. The number of days’ sales in
accounts receivable indicates that the accounts
receivable are relatively current, assuming that
the credit terms are net 30.
(continued)
Problem Solution
k.
(concluded)
The company’s ROI is relatively low, and the
two-year trend is down. This would be a major
concern, and the reasons for this situation would
be sought. The price/earnings ratio of 13 is
typical for a firm with a falling ROI; the fact that
the P/E ratio has remained within the “normal”
range may indicate that future earnings
prospects for the firm are fairly strong.
Accounting
What the Numbers Mean 10e
You should now have a better understanding
of ratio analysis.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele