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MBA 520 Module Two Financial Statement Analysis Worksheet The main goal of financial statement analysis is to use past and current performance to identify changes and trends that will affect a company. Financial ratios are a widely used form of financial analysis in which the relationship between two or more line items is analyzed to evaluate a company’s performance. The calculations you practice in this assignment will be applicable in completing Milestone One, specifically determining recent financial performance and current financial health. Prompt Reference the information found in the Module Two Financial Statements Analysis Data PDF located in the Assignment Guidelines and Rubrics folder to complete the following. Once you have calculated the ratios asked for using the data in the PDF, provide a brief summary of how the ratios are used and why they are important. Once you have completed the calculations, provide a brief, two- to four-sentence rationale for how these calculations can be used in analyzing the financial position of a company and why they are important. Your rationale should explain what information the ratio provides to the reader and how the reader may use that information. Use the Shapiro Library, your text, and the non-graded discussion forum in this module to ask questions of your peers to inform your responses to the questions below. Before beginning this assignment, you will need to download and/or print the Module Two Financial Statements Analysis Data PDF in order to complete the assignment. 1. Calculate XYZ’s 2013 current and quick ratios based on the projected balance sheet and income statement data. Current Ratio = Current Assets / Current Liabilities Current Ratio = $2,680,112/$1,144,800 = 2.34 The Current Ratio is a measure of a company’s liquidity, ie: how easily a company can come up with cash to meet its liabilities. A higher current ratio is better, meaning the company has an easier time meeting its financial obligations. 2. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. Inventory Turnover = Cost of Goods Sold / Average Inventories Inventory Turnover = $5,875,992 / (($1,716,480+$1,287,360) / 2) = 3.91 Inventory Turnover is a measure of how quickly a company sells its inventory. A higher Inventory Turnover ratio is better, meaning a company is selling its inventory faster. Days Sales Outstanding = (Accounts Receivable / Revenue) x Number of Days in Year Days Sales Outstanding = ($878,000/$7,035,600) x 365 = 45.55 days Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

Days Sales Outstanding is a measure of how many days it takes to collect on receivable balances. A lower Days Sales Outstanding number is better, meaning a company is collecting its receivables faster. Fixed Assets Turnover = Sales / Net Fixed Assets Fixed Assets Turnover = $7,035,600 / 380,120 = 18.51 The Fixed Assets Turnover is a measure of how much sales are generated by a company’s fixed assets. A higher Fixed Assets Turnover ratio is better, indicating a company uses its fixed assets more efficiently. Total Assets Turnover = Net Sales / Total Assets Total Assets Turnover = $6,425,992 / $3,497,152 = 1.84 The Total Assets Turnover ratio is a measure of how efficiently a company is using its assets to generate revenue. A higher Total Assets Turnover Ratio is better, meaning a company is more efficiently using its assets to generate revenue. 3. Calculate the 2013 debt-to-assets and times-interest-earned ratios. Debt-To-Assets Ratio = Total Debt / Total Assets Debt-To-Assets Ratio = $1,544,800 / $3,497,152 = 0.44 The Debt-To-Assets Ratio is a measure of how a company is financed. A higher Debt-To-Assets ratio means a company is more heavily financed with debt rather than equity. Times-Interest-Earned Ratio = Earnings Before Interest and Taxes / Interest Expense Times-Interest-Earned Ratio = ($253,584 + $70,008 + $169,056) / $70,008 = 7.04 The Times-Interest-Earned ratio is a measure of how easily a company can meet its debt obligations. A higher Times-Interest-Earned ratio means a company can more easily meet its debt obligations. 4. Calculate the 2013 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). Operating Margin = Operating Income / Sales Operating Margin = $609,608 / $7,035,600 = .087 = 8.7% The Operating Margin is a measure of a company’s core business. A higher Operating Margin means a company’s core operating business is more profitable. Profit Margin = Net Income / Sales Profit Margin = $253,584 / $7,035,600 = .036 = 3.6% The Profit Margin is a measure of the overall profitability of a company, when debt and taxes are taken into consideration. A higher Profit Margin is better. BEP = EBIT / Total Assets BEP = $492,648 / $3,497,152 = .14 Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

The BEP ratio is a measure of the earnings of a company ignoring the effects of taxes and debt. A higher BEP ratio means the company generates more earnings from their assets. Return on Assets = Net Profits / Total Assets Return on Assets = $253,584 / $3,497,152 = .073 The Return on Assets is a measure of a company’s ability to use its assets to create profits. A higher Return on Assets number means a company is generating more net profits from its assets. Return on Equity = Net Income / Shareholder’s Equity Return on Equity = $253,584 / $1,721,176 = .15 The Return on Equity is a measure of the return on an investor’s investment in the company. The higher the Return on Equity the more return an investor is receiving on his or her investment in the company. 5. Calculate the 2013 price/earnings ratio, and market/book ratio. Price/Earnings Ratio = Stock Price / Earnings Per Share Price/Earnings Ratio = $12.17 / $1.014 = 12.00 The Price/Earnings ratio is a measure of how much an investor has to invest in order to earn one dollar. A higher Price/Earnings ratio means an investor is willing to pay more per each dollar of company earnings. Market/Book Ratio = Stock Price / Book Value Per Share Market/Book Ratio = $12.17 / $7.809 = 1.56 The Market/Book ratio is a measure of the market value of a company relative to its historic book value. It is a measure of how much investors are willing to pay for each dollar in net assets of a company. 6. Use the extended DuPont equation to provide a summary and overview of XYZ’s financial condition as projected for 2013. DuPont Equation = EBIT/Sales x Sales/Total Assets x Net Income/Pretax Income x Pretax Income/EBIT x Assets/Equity DuPont Equation = $492,648/$7,035,600 x $422,640/$492,648 x $253,584/$422,640 x $422,640/$492,648 x $3,497,152/$1,952,352 DuPont Equation = .07 x .86 x .6 x .86 x 1.79 DuPont Equation = .0553 = 5.53% The DuPont equation tells us that an investor can expect to earn 5.53% on his or her investment. This is a big improvement compared to the 2012 actual number of -32.5%. Based on the ratios above, we can see that compared to 2012, XYZ has improved in the operating margin ratio and return on assets. In Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

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2012 the assets/equity ratio in 2012 was 5.82, compared to 1.79 expected in 2013. This means that a higher portion of the company was financed with debt in 2012. A higher assets/equity ratio improves the return on equity figure though, so this is expected to slightly deteriorate from 2012 to 2013. 7. Use the following simplified 2013 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change “ripple through” the financial statements (shown in thousands below) and influence the stock price? Accounts receivable $878 Debt $1,545 Other current assets 1,802 Net fixed assets 817 Equity 1,952 Total assets $3,497 Liabilities plus equity $3,497 First, we need to calculate XYZ’s daily sales. Daily sales = Sales / 365 Daily sales = $7,035,600 / 365 Daily sales = $19,275.62 Target A/R = Daily sales × Target DSO Target A/R = $19,276 × 32 Target A/R = $616,820 Freed-up cash =old A/R – new A/R Freed-up cash =$878,000 – $616,820 Freed-up cash =$261,180 Investors require a return on their investment in the form of either dividends or selling their stock for more than they paid for it. The dividends an investor receives comes from the company’s ability to have free cash available to distribute to investors. By lowering the Days Sales Outstanding, less cash is tied up in receivables and is instead collected. This cash that is collected can either be used to distribute to investors, or, to be invested in a project that would generate a higher rate of return for the company. This availability of cash that the firm could use would be seen on the Statement of Cash Flows, and investors would recognize it and adjust the value of the stock appropriately. Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

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