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This case study examines the financial performance of Pinnacle Company through various financial ratios and common-size income statement analysis. The study aims to assess the company's financial stability and identify potential areas of concern. The analysis covers three years: 2007, 2008, and 2009.
The cash ratio measures a company's ability to cover its current liabilities with its cash and marketable securities.
A higher cash ratio is generally more favorable.
| Year | Cash Ratio |
|---|---|
| 2009 | 0.03 |
| 2008 | 0.36 |
| 2007 | 0.43 |
Analysis: The cash ratio has decreased significantly from 2008 to 2009, indicating that Pinnacle has a lower ability to cover its current liabilities with cash and marketable securities. However, the cash ratio remains relatively low in all years, suggesting that Pinnacle may need to improve its liquidity management.
The current ratio measures a company's ability to cover its current liabilities with its current assets. A higher current ratio is generally more favorable.
| Year | Current Ratio |
|---|---|
| 2009 | 0.63 |
| 2008 | 0.79 |
| 2007 | 0.85 |
Analysis: The current ratio has also decreased from 2008 to 2009, indicating that Pinnacle's ability to cover current liabilities with current assets has declined.
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However, the current ratio remains above 1 in all years, suggesting that Pinnacle can meet its short-term obligations.
The accounts receivable turnover measures how efficiently a company collects payments from its customers. A higher turnover is generally more favorable.
| Year | Accounts Receivable Turnover |
|---|---|
| 2009 | 16.79 |
| 2008 | 15.47 |
| 2007 | 14.15 |
Analysis: The accounts receivable turnover has improved over the years, indicating that Pinnacle has become more efficient in collecting payments from its customers. In 2009, Pinnacle achieved a turnover of 16.
79, reflecting a shorter collection period.
Days to collect receivables measures the average number of days it takes for a company to collect payments from customers. A lower number of days is generally more favorable.
| Year | Days to Collect Receivables |
|---|---|
| 2009 | 21.74 days |
| 2008 | 23.59 days |
| 2007 | 25.80 days |
Analysis: The days to collect receivables have decreased over the years, indicating that Pinnacle is collecting payments from customers more quickly. In 2009, it took an average of 21.74 days to collect receivables, showing an improvement in efficiency.
The inventory turnover measures how efficiently a company sells its inventory. A higher turnover is generally more favorable.
| Year | Inventory Turnover |
|---|---|
| 2009 | 4.35 |
| 2008 | 4.01 |
| 2007 | 3.68 |
Analysis: The inventory turnover has improved over the years, indicating that Pinnacle is selling its inventory more efficiently. In 2009, the inventory turnover was 4.35, reflecting a shorter time to sell inventory.
The debt to equity ratio measures the proportion of a company's financing that comes from debt compared to equity. A lower ratio is generally more favorable.
| Year | Debt to Equity |
|---|---|
| 2009 | 0.46 |
| 2008 | 0.33 |
| 2007 | 0.32 |
Analysis: The debt to equity ratio has increased from 2007 to 2009, indicating a higher proportion of debt in the company's financing. However, the ratio is still relatively low, suggesting that Pinnacle has a favorable debt-equity structure.
The times interest earned ratio measures a company's ability to cover its interest expenses with its operating income. A higher ratio is generally more favorable.
| Year | Times Interest Earned |
|---|---|
| 2009 | 3.25 |
| 2008 | 2.82 |
| 2007 | 2.28 |
Analysis: The times interest earned ratio has improved over the years, indicating that Pinnacle's ability to cover interest expenses with operating income has strengthened. In 2009, the ratio was 3.25, reflecting a more comfortable financial position.
The earnings per share measure the company's profitability on a per-share basis. A higher EPS is generally more favorable.
| Year | Earnings Per Share (EPS) |
|---|---|
| 2009 | 3.26 |
| 2008 | 2.47 |
| 2007 | 1.49 |
Analysis: The earnings per share have increased over the years, indicating improved profitability on a per-share basis. In 2009, the EPS was 3.26, reflecting higher earnings for shareholders.
The gross profit percent measures the percentage of sales revenue that remains as gross profit after deducting the cost of goods sold. A higher gross profit percent is generally more favorable.
| Year | Gross Profit Percent |
|---|---|
| 2009 | 29.77% |
| 2008 | 29.79% |
| 2007 | 29.51% |
Analysis: The gross profit percent has remained relatively stable over the years, indicating consistent profitability in terms of gross profit percentage.
The profit margin measures the percentage of net income in relation to net sales. A higher profit margin is generally more favorable.
| Year | Profit Margin |
|---|---|
| 2009 | 4% |
| 2008 | 4% |
| 2007 | 4% |
Analysis: The profit margin has remained consistent over the years, indicating a stable percentage of net income in relation to net sales.
The return on assets measures a company's ability to generate income from its assets. A higher ROA is generally more favorable.
| Year | Return on Assets (ROA) |
|---|---|
| 2009 | 0.05 |
| 2008 | 0.04 |
| 2007 | 0.03 |
Analysis: The return on assets has improved over the years, indicating that Pinnacle has become more effective in generating income from its assets. In 2009, the ROA was 0.05, reflecting better asset utilization.
The return on common equity measures the profitability of common shareholders' equity. A higher return is generally more favorable.
| Year | Return on Common Equity |
|---|---|
| 2009 | 0.07 |
| 2008 | 0.06 |
| 2007 | 0.04 |
Analysis: The return on common equity has improved over the years, indicating higher profitability for common shareholders. In 2009, the return was 0.07, reflecting increased returns for common equity holders.
Based on the financial ratio analysis, the likelihood of Pinnacle failing financially in the next 12 months is low. Several key indicators support this assessment:
Furthermore, the profitability ratios, such as earnings per share, gross profit percent, profit margin, return on assets, and return on common equity, have shown positive trends over the years, indicating increased profitability and effective utilization of assets and equity.
Overall, the financial ratios suggest that Pinnacle is in a relatively stable and healthy financial position, with no immediate signs of financial distress. However, it is essential to monitor these ratios regularly to ensure continued financial stability and growth.
In addition to the financial ratios, we also analyzed the common-size income statement data to identify potential areas of misstatement. We examined two divisions of Pinnacle Company: Welburn Division and Solar-Electro Division.
| Account | Balance | Estimate of $ of Potential Misstatement |
|---|---|---|
| Training | $26,928 | To be estimated |
| Depreciation | $880,286 | To be estimated |
| Executive Salaries | $174,362 | To be estimated |
| Account | Balance | Estimate of $ of Potential Misstatement |
|---|---|---|
| Legal Fees | $234,669 | To be estimated |
| Miscellaneous Office Expense | $202,331 | To be estimated |
Based on the information provided, it is challenging to assess the exact dollar amount of potential misstatement without further detailed analysis and audit procedures. However, it is essential to focus on these specific divisions to investigate potential misstatements thoroughly.
Among the provided data, the information in requirement d (division-specific data) provides the most useful data for evaluating the potential for misstatements. This is because it allows auditors to focus on specific divisions (Welburn Division and Solar-Electro Division) and their respective accounts, making it easier to pinpoint potential issues and conduct a more targeted audit. Requirement c, on the other hand, provides an overview of accounts without division-specific details, making it less precise in identifying potential misstatements.
The financial analysis of Pinnacle Company's ratios and common-size income statement data indicates that the company is in a relatively healthy financial position with a low likelihood of failing financially in the next 12 months. Key liquidity, efficiency, solvency, profitability, and return ratios have shown positive trends over the years.
However, the analysis also highlights the importance of conducting a detailed audit, especially in specific divisions such as Welburn Division and Solar-Electro Division, to investigate potential misstatements further. Monitoring financial ratios and conducting regular audits will help ensure the company's continued financial stability and growth.
Disclaimer: The assessment provided in this case study is based on the information and calculations available. It is essential for Pinnacle Company to engage in thorough financial analysis and auditing procedures to make informed financial decisions.
Case Study: Financial Analysis of Pinnacle Company. (2016, Mar 05). Retrieved from https://studymoose.com/document/case-study-part-1-pinnacle
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