Income Statements 2012-2013 Sales, Cost Of Goods Sold

Income Statements20122013sales34320005834400cost Of Goods Sold E

Income Statements Sales $3,432,000 $5,834,400 Cost of goods sold except depr. 2,864,980,000 Depreciation and amortization 189,600 Other expenses 340,000 Total operating costs $3,222,900 $5,816,960 EBIT $209,100 $17,440 Interest expense 62,000 EBT $146,600 ($158,560) Taxes (40%) 58,424 Net income $87,960 ($95,136) Other Data Stock price $8.50 $6.00 Shares outstanding 100,000 EPS $0.88 ($0.95) DPS $0.11 Tax rate 40% 40% Book value per share $6.64 $5.58 Lease payments $40,000 $40,000 Ratio Analysis Current 2.5 Quick 0.5 Inventory turnover Days sales outstanding 37.6 Fixed assets turnover .2 Total assets turnover 2. Debt ratio 35.60% 59.60% Liabilities-to-assets ratio 54.80% 80.70% TIE 3.1 EBITDA coverage 2.8 Profit margin 2.60% –1.6% Basic earning power 14.20% 0.60% ROA 6.00% –3.3% ROE 13.30% –17.1% Price/Earnings (P/E) 9.7 –6.3 Price/Cash flow .5 Market/Book 1...

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Financial analysis of a company provides crucial insights into its operational efficiency, liquidity, profitability, and overall financial health. Based on the provided income statements and related data for the years 2012 and 2013, this paper aims to evaluate several financial metrics, including free cash flow, impact of tax law changes on reported profit and cash flow, liquidity ratios, turnover ratios, leverage ratios, profitability ratios, valuation ratios, and finally, an overall assessment using the extended DuPont analysis.

1. Calculation of Free Cash Flow (FCF) for 2013

Free Cash Flow (FCF) is an essential measure indicating the cash generated by the company's operations after capital expenditures. It can be calculated using the formula:

FCF = EBIT - Taxes + Depreciation & Amortization - Capital Expenditures - Change in Working Capital

Given data for 2013:

  • EBIT = $17,440
  • Taxes (40% of EBT) = $58,424 (as provided)
  • Depreciation and amortization = $189,600
  • Lease payments are recurring expenses but are not capital expenditures; hence, excluded unless specified

Assuming no change in working capital and capital expenditures (since not explicitly provided), the FCF can be approximated as:

FCF ≈ EBIT - Taxes + Depreciation & Amortization

Calculating taxes (already provided): $58,424

Therefore, FCF = $17,440 - $58,424 + $189,600 = $148,616

Thus, the free cash flow for 2013 is approximately $148,616. This positive FCF indicates that, after accounting for taxes and non-cash charges, the company generated substantial cash from its operations.

2. Impact of Doubling Depreciation Expenses on Profit and Cash Flow

If Congress changed tax laws resulting in doubling depreciation expenses, depreciation would increase from $189,600 to $379,200, with no change in operations. This would directly affect net income and potentially cash flow.

Impact on reported profit:

  • Higher depreciation expense reduces EBIT and net income.
  • Since depreciation is a non-cash expense, increased depreciation directly lowers taxable income, thus reducing taxes paid.

Calculations show that net income would decline due to higher depreciation. Specifically, pre-tax earnings would decrease by $189,600, and taxes (40%) would be lower by approximately $75,840 (40% of the additional depreciation), so net income would decrease by $113,760. The new net income would be roughly –$113,760, indicating a loss.

Impact on net cash flow:

  • Cash flow from operations would increase by the amount of depreciation expense (since it's non-cash) minus the impact of taxes saved.
  • The increased depreciation would reduce taxes payable, resulting in tax savings of approximately $75,840, thereby increasing cash flow.

Overall, while net income would decrease, net cash flow would increase due to higher depreciation-related tax savings. This scenario emphasizes that depreciation affects accounting income more significantly than cash flow, reinforcing the importance of cash flow analysis in financial assessments.

3. Liquidity Ratios for 2013

Using the projected data and balances, the current and quick ratios assess liquidity:

  • Current ratio = Current assets / Current liabilities = 2.5
  • Quick ratio = (Current assets – Inventory) / Current liabilities = 0.5

The current ratio of 2.5 indicates sufficient short-term assets to cover current liabilities, revealing good liquidity. The quick ratio of 0.5 suggests that the company relies heavily on inventory and receivables to meet short-term obligations, which could pose liquidity risks if inventory or receivables decline or become less liquid.

Overall, the ratios suggest that the company maintains adequate overall liquidity but may face challenges in quickly converting assets other than inventory to cash for immediate obligations.

4. Turnover Ratios for 2013

Calculations of turnover ratios reflect operational efficiency:

  • Inventory turnover = Cost of goods sold / Average inventory. Since specific inventory levels are not given, assuming it aligns with the ratio analysis: inventory turnover is implied to be consistent with industry standards based on data provided.
  • Days sales outstanding (DSO) = 37.6 days. This measures receivables collection efficiency.
  • Fixed assets turnover = Sales / Net fixed assets. Given the ratio of 0.2, it indicates low efficiency in utilizing fixed assets to generate sales.
  • Total assets turnover = 2.0, suggesting the company generates $2 in sales for every dollar of total assets.

This data indicates that while the company effectively manages receivables, its fixed assets utilization is relatively inefficient, and overall asset efficiency is moderate.

5. Leverage Ratios for 2013

Leverage ratios provide insights into financial risk:

  • Debt ratio = 59.6%, implying that more than half of the company's assets are financed through debt, indicating higher leverage.
  • Liabilities-to-assets ratio = 80.7%, reinforcing significant leverage that could imply higher financial risk.
  • Times-interest-earned (TIE) = 3.1, showing the company's ability to cover interest expenses three times over, a moderate coverage ratio.
  • EBITDA coverage ratio = 2.8, suggesting sufficient cash flow to service debt commitments.

High leverage ratios reveal increased risk, but coverage ratios suggest the company maintains adequate capacity to meet debt obligations, though caution should be exercised given the high leverage.

6. Profitability Ratios for 2013

Assessment of profitability ratios indicates operational efficiency:

  • Profit margin = 2.6%, indicating that only a small portion of sales converts to net income.
  • Basic earning power (BEP) = 14.2%, reflecting the company's ability to generate EBIT from assets before interest and taxes.
  • Return on assets (ROA) = 6.0%, demonstrating the efficiency of asset utilization.
  • Return on equity (ROE) = 13.3%, indicating the profitability for shareholders post-leverage.

The relatively low profit margin suggests margin pressure, but satisfactory ROA and ROE indicate management's effective use of assets and equity to generate earnings.

7. Valuation Ratios for 2013

Market valuation ratios include:

  • Price/Earnings (P/E) ratio = 9.7, implying investor expectations of moderate growth and earnings potential.
  • Price/Cash flow ratio = 0.5, indicating that market perception is tied closely to cash flow affordability.
  • Market/Book ratio close to 1 indicates that the market values the company's equity roughly at book value, reflecting a balanced market view.

These ratios suggest modest valuation levels, with markets possibly perceiving limited growth prospects or operational risks.

8. Extended DuPont Analysis and Overall Financial Assessment

The extended DuPont model decomposes ROE into profit margin, asset turnover, and equity multiplier, providing a comprehensive view of financial performance:

ROE = Profit Margin × Asset Turnover × Equity Multiplier.

Based on the data:

  • Profit Margin = 2.6%
  • Assets Turnover = 2.0
  • Equity Multiplier (Assets / Equity) = 1 / (1 – Debt Ratio) = 1 / (1 – 0.596) ≈ 2.45

Thus, ROE ≈ 2.6% × 2.0 × 2.45 ≈ 12.74%, aligning closely with the reported 13.3%, confirming the formula's validity.

Major strengths include decent profitability and efficient asset utilization, supported by moderate leverage. However, weaknesses involve high leverage, low profit margins, and relatively inefficient fixed asset utilization, posing risks in downturns.

In conclusion, the company's projected 2013 financials reveal a firm with solid liquidity, moderate profitability, and high leverage. Strategic focus on debt management and operational efficiencies could significantly enhance overall financial health.

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