MBA 520 Module Two Financial Statement Analysis Works 054682

MBA 520 Module Two Financial Statement Analysis Worksheet The main goal

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. Reference the information found in the Module Two Financial Statements Analysis Data PDF to complete the following tasks:

Calculate the specified financial ratios based on the provided data. After completing the calculations, provide a brief summary of how these ratios are used and why they are important. Then, include a two- to four-sentence rationale explaining how these ratios can be used in analyzing a company's financial position, what information they provide, and how that information may influence decision-making. Use the Shapiro Library, your textbook, and the non-graded discussion forum to inform your understanding. Download or print the financial data PDF before beginning the assignment.

Tasks include:

1. Calculate XYZ’s 2013 current and quick ratios based on the projected balance sheet and income statement data.
2. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
3. Calculate the 2013 debt-to-assets and times-interest-earned ratios.
4. Calculate the 2013 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).
5. Calculate the 2013 price/earnings ratio and market/book ratio.
6. Use the extended DuPont equation to provide a summary and overview of XYZ’s financial condition as projected for 2013.
7. Using the simplified 2013 balance sheet data, analyze how an improvement in DSO from 45.6 days to the industry average of 32 days would impact the company’s financial statements and stock price, including calculating the impact on cash flow derived from accounts receivable.

Paper For Above instruction

Financial ratio analysis is a vital tool in assessing a company's financial health, operational efficiency, and valuation. Effective interpretation of these ratios helps stakeholders—management, investors, and creditors—make informed decisions based on the company's current performance and future prospects. This paper provides a comprehensive overview of key financial ratios calculated for XYZ Company for the year 2013, along with their significance and implications for the company's financial strategy and stock valuation.

Liquidity Ratios:

The current ratio and quick ratio are primary indicators of short-term liquidity, measuring a company’s ability to cover its current liabilities with its current assets. For XYZ in 2013, the current ratio is calculated by dividing current assets ($2,680,112) by current liabilities ($1,144,800), resulting in approximately 2.34. This exceeds the industry average of 1.2, indicating that XYZ has a comfortable margin to meet its short-term obligations. The quick ratio isolates liquid assets—cash, marketable securities, and accounts receivable—excluding inventories, which provides a more conservative measure of liquidity. Calculating as quick assets ($878,200 accounts receivable + cash $85,632 = $963,832) divided by current liabilities yields approximately 0.84, slightly below the industry average of 0.8 but still reflective of strong liquidity (Brigham & Houston, 2016). Such ratios indicate that XYZ has sufficient liquidity, though reliance on receivables emphasizes the need for efficient collection procedures.

Asset Management Ratios:

Inventory turnover and days sales outstanding (DSO) assess operational efficiency. XYZ’s inventory turnover ratio is calculated with cost of goods sold ($5,875,992) divided by average inventory (($1,716,480 + $1,287,200) / 2 = $1,501,840), resulting in approximately 3.92 times, which is below the industry average of 4.7, suggesting slower inventory movement. The DSO is derived from net sales divided by 365 days, which for XYZ results in approximately 60.8 days, indicating collection periods longer than the industry standard of 37.4 days. Improving collection efficiency and reducing DSO can positively impact cash flow and reduce financing costs, reflecting operational improvements (Ross, Westerfield, & Jaffe, 2016). The fixed assets turnover ratio, which measures asset utilization, is calculated as net sales ($7,035,600) divided by net fixed assets ($817,040), equaling approximately 8.62 times, slightly below the industry average of 10, implying operational underutilization.

Leverage Ratios:

The debt-to-assets ratio is vital for assessing long-term solvency. For XYZ, total debt ($1,544,800) divided by total assets ($3,497,152) yields approximately 44.2%, below the industry benchmark of 54.8%, indicating a moderate leverage position. The times-interest-earned (TIE) ratio, calculated as EBIT ($492,648) divided by interest expense ($70,012), results in approximately 7.03, indicating a healthy buffer to cover interest obligations, thus reflecting sound financial leverage and less financial risk (Brigham & Houston, 2016).

Profitability Ratios:

Operating margin (operating income divided by sales) and profit margin (net income divided by sales) reveal operating efficiency and overall profitability. XYZ’s operating margin is approximately 7.0% ($492,648/$7,035,600), and the profit margin is approximately 3.6% ($253,584/$7,035,600). Although these margins are below the industry averages, upward improvements could result from cost management or higher pricing strategies. Return on assets (ROA), calculated as net income ($253,584) divided by total assets ($3,497,152), is approximately 7.25%, and return on equity (ROE), calculated as net income divided by total equity ($1,952,352), is about 12.97%. These figures reflect moderate profitability, with potential for enhancement through operational efficiencies.

Valuation Ratios:

The price/earnings (P/E) ratio, calculated by dividing market price per share ($12.17) by EPS ($1.014), results in approximately 12.01, suggesting moderate growth expectations. The market-to-book ratio is computed as market value per share ($12.17) divided by book value per share ($7.809), yielding approximately 1.56, indicating the market values the company's assets somewhat above their book value, reflecting investor confidence (Fama & French, 1992).

Extended DuPont Analysis:

The DuPont model decomposes ROE into profit margin, asset turnover, and financial leverage. For XYZ, ROE can be approximated as (Net income / sales) x (Sales / Total assets) x (Total assets / Equity). Using calculated ratios, the DuPont breakdown reveals that the company's ROE is positively influenced by adequate profit margins and asset management efficiency but somewhat limited by leverage, highlighting areas for strategic focus.

Impact of DSO Improvement:

Reducing DSO from 45.6 days to 32 days enhances cash flow by decreasing accounts receivable. Based on daily sales of approximately $19,276, the reduction in receivables (from $878,000 to $616,820) frees up around $261,180 in cash. This improved liquidity can reduce external financing needs, lower interest costs, and potentially increase stock value. Efficient receivables management directly contributes to liquidity enhancement and market valuation, illustrating the critical link between operational efficiency and shareholder wealth (Ross et al., 2016).

References

• Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.
• Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), 427-465.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate finance (11th ed.). McGraw-Hill Education.
• Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons.
• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.
• Higgins, R. C. (2012). Analysis for financial management (10th ed.). McGraw-Hill/Irwin.
• Weston, J. F., & Brigham, E. F. (2014). Managerial finance (14th ed.). Cengage Learning.
• Penman, S. H. (2012). Financial statement analysis and security valuation (5th ed.). McGraw-Hill Education.
• Gartner, S., & Coenenberg, A. G. (2021). Financial statement analysis: A practitioner's guide. Springer.
• Palepu, K. G., & Healy, P. M. (2018). Business analysis & valuation: Using financial statements (6th ed.). Cengage Learning.