BUS-FPX407 Assessment 1 Attempt 1

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Adi’yah Williams Assessment 1, Problem 1. XYZ Inc.: Balance Sheet as of December 31, 2013 (in thousands) Cash $75,000 Accounts Payable $150,000 Receivables 300,000 Notes Payable 90,000 Inventories 125,000 Other current liabilities 110,000 Total current assets 500,000 Total Current Liabilities $350,000 Long-term debt 250,000 Net fixed assets 500,000 Common equity 400,000 Total assets $1,000,000 Total liabilities and equity $1,000,000 XYZ Inc.: Income Statement for Year Ended December 31, 2012 (in thousands) Sales $1,607,500 Cost of goods sold Materials $717,000 Labor 453,000 Heat, light, and power 68,000 Indirect labor 113,000 Depreciation 41,500 1,392,500 Gross Profit $215,000 Selling expenses 115,000 General and administrative expenses 30,000 Earning before interest and taxes (EBIT) $70,000 Interest expense 24,500 Earnings before taxes (EBT) $45,500 Federal and state income taxes (40%) 18,200 1

Ratio XYZ Inc. Industry Average Current 1.4X 2.0x Quick 1.1 1.3x Days sales outstanding 68 days 35 days Inventory turnover 12.9x 6.7x Total assets turnover 1.6x 3.0x Profit margin 1.7% 1.2% ROA 2.7% 3.6% ROE 6.8% 9.0% 1.1 Calculate the indicated ratios XYZ. Current Ratio is the current assets divided by liabilities. 500,00/350,000 = 1.4X Quick ratio is the current assets - inventories divided by the current liabilities. 500,000- 125,000/350,000 = 1.1X Days sales outstanding ratio is the receivables divided by the average sales each day for 365 days. 300,000/(1,607,500/36)=300,000/4,404.110= 68 days Inventory turnover is the sales divided by inventories. 1,607,500/125,000=12.9X Total assets turnover is the sales divided by the total assets. 1,607,500/1,000,000 = 1.6X Profit margin is the net income divided by sales. 27,300/1,607,500 = 1,7% ROA is net income divided by total assets. 27,300/1,000,000=2.7% ROE is the net income divided by the common equity. 27,300/400,000 =6.8% 1.2 Construct the DuPont equation for both XYZ and the industry. ROE = ROA Equity multiplier Profit margin X Total assets turnover X Equity multiplier Net income X Sales X Total asset Sales Total assets Total common equity XYZ 27,300 X 1,607,500 X 1,000,000 1,607,500 1,000,000 400,000 = 1.7% X 1.6X X 2.5X = 6.8 2

Industry = 1.2% X 3.0X X 2.5X = 9.0 1.3 Use your analysis to outline XYZ's strengths and weaknesses. One of XYZ's advantages is that its inventory turnover is 12.9X, compared to the industry average of 6.7X. This indicates that XYZ sells and replaces its inventory more quickly than the industry average. Because they can turn sales into income rather than skirt expenses, XYZ's profit margin is safer than the industry average. XYZ's weaknesses include 51% more days of sales outstanding than the industry average. To help strengthen other weak sectors, the number of days to collect receivables must be increased. With debt to pay for expenses, their ROA is 2.7%, and their ROE is 6.8%, given that their current liabilities account for 70% of their existing assets. The income-to- debt ratio has a significant impact, especially in unexpected or emergencies. Additionally, a ROE analysis would be required for shares or shareholders. They have a lower rate of return to investors than the sector average, but their debt is beginning to outweigh XYZ's revenue. 1.4 Say XYZ had doubled its sales as well as its inventories and common equity during 2013. Do you think this would affect the validity of your ratio analysis? No calculations are necessary. Increases in common equity, sales, and inventories would all be noticeable. A greater than 50% increase would be made to some areas of the ratio analysis. A healthier image would result in a profit margin of only 50.8%. Days Sales Outstanding ratio at the industry average decreased from 68 to 34 days. While overall asset turnover would increase to 2.9x, above industry, inventory turnover would stay at 12.9x. These 3

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increases will impact the validity of some ratio analyses intended to enhance the company's prognosis for its stock or shareholders. Part 2: Investment Analysis 1-2 pages ● What are some of the qualitative factors that must be considered when selecting a company in which to invest? Leadership is crucial for a firm to succeed now and in the future. Determining if the owner(s) is/are actively involved in the business is an important finding. An absentee owner may indicate a lack of genuine involvement in the company and its current and future success. A prospective investor gets the impression that the owner is fully committed to the firm and makes every effort to ensure its success when they demonstrate interest and work hard on it. Regarding personnel, we can say roughly the same thing. Employee performance is a significant factor in the business's success. Customers perceive a company's integrity and longevity based on their work ethics, loyalty, dependability, and product or service expertise. Regarding clients or consumers, the same is true. Is the company located in a place that draws in the target demographic, and does it have a loyal customer base? A company needs to ensure that the people it wishes to attract can find it where it is. The firm must be in an industrial region for local businesses to utilize a metal shop or manufacturing company's services or products. A key element in the business's success is competition. Many competitors cut into the profit margin and lower the rates they charge customers to win their business. 4

What unique offering does the company under consideration have over its rivals, and how long will this last? Research and development follow from this. ● What financial ratios would you examine, and why? The most important financial ratio I would examine first would be the quick ratio. (Current Assets-inventory)/Current liabilities. I would examine the quick ratio because it explains a business's short-term debt can be covered by its existing liquid assets or cash. The company will have a more significant financial position if the quick ratio exceeds one. The second financial ratio I would examine is the debt-to-equity ratio to determine if the company is borrowing more than it can reasonably pay back using equity as a metric. (Total Liabilities/Shareholders Equity.) Ensuring if the ratio value is below one, the company holds less debt. The third financial ratio I would examine would be the price-to-earnings ratio. (Shares/Earning per share.) The price to earnings or P/E divides the company's share price by its earnings for each share. It's essential to evaluate the P/E because it gives a company an idea of whether a stock is undervalued or overvalued. ● What non-financial factors would you examine, and why? Competition, staff, and considerations based on geography and client base are some of the non-financial aspects that might be significant. A firm's success depends on its location, which must be in a customer-focused region. A company targeting college students should be close to one or more nearby institutions or colleges. Every four to five years, the client base shifts as new students move into the neighborhood and the 5

departing consumers move on. Every graduating class will receive brand-new merchandise. By doing this, the goods will remain untouched and fresh. The staff has a significant impact on clients and their recurring business. A diligent and devoted worker, manager, supervisor, or even owner discourages clients from defecting. A connection is made between the company and the client through getting to know them and gauging their needs and wants. This creates security in the product. Part 3 Forecast ● How would you forecast revenue, profitability, and asset management, such as inventory control and accounts receivable, for a hypothetical manufacturing company? Business forecasting is typically approached using one of two methods: quantitative or qualitative. Quantitative relies on data accumulation, and patterns are found through statistical analysis. This approach works well for determining variables and determining cause-and-effect relationships. Conversely, qualitative uses best judgment and expert opinion. Industry markets with recent upheavals or little historical data are the most outstanding candidates for it. Quantitative forecasting focuses on current or past figures, data, and algorithms. The previously learned ratios will help assess past performance and project future results. To project income, profitability, and asset management—including accounts receivable and inventory control—data from previous years must be gathered and examined to determine statistical outcomes and future expectations. 6

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● What ratios would you analyze? A comparison of financial statements over several years can be used to calculate the inventory turnover, days sales outstanding, and quick ratio. The consistency with which the business can replenish its inventory to boost sales. If the day's sales exceed the terms of the customer, then an increase in sales becomes a significant element. This can indicate that the accounting parts are not under your control. How the business uses its short- and long-term debt will help you understand how sales revenue and liquid assets are affected. ROA and ROE will aid forecasting with stakeholders or stockholders. Does the business have the durability to withstand any upcoming turbulence? ● What techniques would you use? Why? Since it relies on accurate data and financial records that can be independently confirmed back to the company's founding and aren't swayed by the opinions or theories of others, the quantitative approach is the most effective. The figures are reliable and, for the most part, supported by paperwork. ● What non-financial factors would be important in your analysis? In addition to employing the quantitative approach and examining ratios derived from historical and current financial accounts to obtain a reliable prediction of the future, I would also investigate the Delphi method. This approach is predicated on inquiries made to specialists. The answers could vary depending on the queries posed. A persuasive argument can change others' opinions. They are surveying professionals in the same sector or field as the company under analysis to find out what other people think of the company and its offerings. 7

References Ltd, T. (2023). International Journal of Political Economy . International Journal of Political Economy. http://www.tandfonline.com.library.capella.edu/ Return on Equity (ROE) - Formula, Examples and Guide to ROE . (n.d.). Corporate Finance Institute. Retrieved December 21, 2023, from https://corporatefinanceinstitute.com/resources/accounting/what-is-return-on-equity-roe/ 7 Important Financial Ratios . (n.d.). GoCardless. Retrieved December 21, 2023, from https://gocardless.com/en-us/guides/posts/top-7-financial-ratios/ Sherman, H. (2011). Finance and accounting for nonfinancial managers (3rd ed.) . https://ebookcentral-proquest-com.library.capella.edu/lib/capella/reader.action? docID=951798 Suarez, J., & Lewis, R. (2023, May 17). Return on Equity (ROE): Definition and How to Calculate It . Business Insider. Retrieved December 21, 2023, from https://www.businessinsider.com/personal-finance/return-on-equity 8

BUS-FPX407 Assessment 1 Attempt 1

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