Joe’s Fly-By-Night Oil Company
Joe’s Fly-By-Night Oil Company
• Prepare a ratio analysis for the fiscal year ended Dec 31, 2012. Organize your analysis per the following outline:
– Current ratio: 25,000/17,000=1.47%
Quick ratio: 25,000-17,000/17,000=25,000
Comments on liquidity- The results cant really determine how well or bad the company is doing until you compare it to another company. This ratio helps show the ability to pay off short term obligations as they are due.
(2) Asset management
– Total Asset turnover: 10,000/40,000=.25
Average collection period (ACP): 10,000/365=27
Comments on asset management- Each $1 of asset is producing .25 in sales. Using assest utilization shows why one firm turns over assests more rapied than another. Average collection period states that it’s taking the customer around 111days to pay off their bills. This indicates how long sales stay on companys books.
(3) Debt management
– Debt ratio: 20,000/40,000=50%
Times interest earned: 3,000/200=15 times
Comments on debt management- Times interest earned shows the number of times that income before interest and taxes covers the interest obligation . The higher the ration the stronger the interest paying ability of the firm .
– Net profit margin:1800/10,000= 18%
-Return on Assets (ROA): 1800/40,000= 4.5%
-Return on Equity (ROE): 1800/20,000= 9.0%
Extended Du Pont equation: .25x.18-0.045(4.5%)
Comments on profitability to include your comments on the sources of ROE
revealed by the Du Pont equation
These types of ratios indicate if the firm is making any money, and how much in relation to whats invested. They also give you an indication of how the firm is doing in controlling its costs.
Net profit margin sales minus all expenses, including interest and taxes . So the net profit margin ratio measures the proportion of each sale dollar that remains after all expenses are paid for . Joes is at 18% .
The ROA should be compared to past years ROA to determine wheather it is good or bad. The ROE is the bottome line which can be compared to other investments and see where they are. It evaluates the return the firm produces. The Du Point equation allows you to understand the source of return but it need to be compared to a similar industry to see truly where the company is.
(5) Market value ratios
– PE ratio: Market price of company stock /earnings per share of stock 50.00/1.80=27.7
– Market to book ratio: Share price of stock/book value per share
To get the book value per share you take total equity /common shares outstanding 20,000/1,000=20 then you take share price /book value per share 1.80/20=.09
Comments on the market value ratios
The M/B ratio gives you an indication of the value of a firm’s intangible non-listed assests. These numbers help you get an idea what it will cost you to get $1 of the firms assets. Stock’s market price represents how much investors are willing to pay today for that claim. I the M/B ratio is higher than 1.0 therefore , you can say that the value of the equity claim has gone up. If you look at the M/B ratio for Joe’s the equity claim has gone up since its at 27.2.
For the purposes of this exercise, assume the following data for Joe’s Fly-By-Night Oil:
Stock price on Dec 31, 2012…$50.00
Number of common shares outstanding on Dec 31, 2012…1,000