Please Complete The Following For Joe's Fly-By-Night Oil Com

Please Complete The Following For Joes Fly By Night Oil Company Whos

Please complete the following for Joe’s Fly-By-Night Oil Company, whose financial statements are shown below: INCOME STATEMENT, 2012 BALANCE SHEET, as of Dec 31, 2012. Prepare a ratio analysis for the fiscal year ended Dec 31, 2012, organized into the following sections: (1) Liquidity - Current ratio and Quick ratio with comments; (2) Asset management - Total Asset turnover and Average collection period (ACP) with comments; (3) Debt management - Debt ratio and Times interest earned with comments; (4) Profitability - Net profit margin, Return on Assets (ROA), Return on Equity (ROE), Extended Du Pont equation with comments on the sources of ROE; (5) Market value ratios - P/E ratio and Market to book ratio with comments. Use the provided financial data and assumptions for market ratios, including a stock price of $50.00 and 1,000 shares outstanding.

Paper For Above instruction

Introduction

Financial ratio analysis is an essential tool for evaluating a company's operational efficiency, financial stability, profitability, and market valuation. For Joe’s Fly-By-Night Oil Company, analysis of liquidity, asset management, debt management, profitability, and market ratios provides comprehensive insights into its financial health as of the end of 2012. This report will interpret key ratios based on the provided financial statements, highlighting the company's strengths and areas for improvement.

Liquidity Ratios

Liquidity ratios assess the ability of a firm to meet its short-term obligations. The current ratio, calculated as current assets divided by current liabilities, is a primary measure. For Joe’s Fly-By-Night Oil, current assets are $25,000 and current liabilities are $17,000, yielding a current ratio of approximately 1.47 ($25,000 / $17,000). This indicates the company has $1.47 in current assets for every dollar of current liabilities, which generally suggests adequate liquidity but leaves limited buffer in an adverse scenario.

The quick ratio, or acid-test ratio, excludes inventory from current assets since inventory can be less liquid. The quick assets sum to cash ($5,000) plus accounts receivable ($3,000), totaling $8,000. With current liabilities at $17,000, the quick ratio is roughly 0.47 ($8,000 / $17,000). This below 1 quick ratio indicates potential liquidity concerns, especially since inventory ($17,000) comprises a significant portion of current assets. The reliance on inventory suggests that although liquidity appears acceptable on a broad current ratio basis, immediate liquidity could be strained if inventory cannot be quickly liquidated.

Comment: The liquidity position shows that Joe’s Fly-By-Night Oil maintains a moderate safety margin to cover short-term liabilities. However, the low quick ratio warrants caution, as the firm may face challenges in meeting obligations promptly without liquidating inventory.

Asset Management Ratios

The total asset turnover ratio measures how efficiently a firm uses its assets to generate sales. It is calculated as sales divided by total assets. With sales of $10,000 and total assets of $40,000, the asset turnover ratio is 0.25 ($10,000 / $40,000). This indicates that for every dollar of assets, the company generates 25 cents in sales—a relatively low efficiency, typical of capital-intensive industries like oil production.

The average collection period (ACP) evaluates receivables management, computed as (Accounts Receivable / Sales) × 365 days. Accounts receivable is $3,000, and sales are $10,000, so ACP is approximately (3,000 / 10,000) × 365 ≈ 109.5 days. This suggests it takes about 110 days to collect receivables, indicating potentially extended credit terms or collection inefficiencies.

Comment: The low asset turnover reflects the high capital investment typical of the oil industry, where significant assets are necessary to support operations. The extended collection period indicates that receivables management could be improved to enhance cash flow efficiency.

Debt Management Ratios

The debt ratio measures leverage and is calculated as total liabilities divided by total assets. With liabilities of $20,000 and total assets of $40,000, the debt ratio is 0.50 (50%). This indicates that half of the company's assets are financed through debt, which is moderate and suggests a balanced capital structure.

Times interest earned (TIE), also known as interest coverage ratio, assesses how comfortably EBIT can cover interest expenses. EBIT is $3,000, and interest is $200, yielding a TIE of 15 ($3,000 / $200). A TIE of 15 signifies strong debt servicing ability, with earnings more than ample to cover interest obligations.

Comment: The company's leverage appears manageable, and its high interest coverage ratio indicates a low financial risk related to debt. Maintaining such coverage provides a cushion against fluctuations in earnings.

Profitability Ratios

The net profit margin, calculated as Net Income divided by sales, is $1,800 / $10,000 = 18%. This indicates that the company retains 18 cents from each dollar of sales after all expenses, reflecting efficient cost management relative to revenue.

Return on Assets (ROA), derived as Net Income divided by Total Assets, is $1,800 / $40,000 = 4.5%. This reveals limited asset utilization efficiency but is acceptable for capital-intensive industries.

Return on Equity (ROE) is Net Income divided by Shareholders' Equity. Shareholders' equity is $20,000, so ROE is $1,800 / $20,000 = 9%. This indicates that the company generates a 9% return on shareholders’ investments.

The extended Du Pont analysis breaks down ROE as follows:

  1. Net Profit Margin: 18%;
  2. Total Asset Turnover: 0.25;
  3. Equity Multiplier: Total Assets / Shareholders’ Equity = $40,000 / $20,000 = 2.

Therefore, ROE = 18% × 0.25 × 2 = 9%, confirming the earlier calculation. The primary driver of ROE here is profit margin, with a moderate asset turnover and leverage contributing to overall return. The equity multiplier indicates a leveraged capital structure, amplifying returns but also increasing risk if earnings decline.

Market Value Ratios

The Price-to-Earnings (P/E) ratio is calculated as Market Price per Share divided by EPS. The stock price is $50.00 per share, and EPS is $1.80, giving a P/E ratio of approximately 27.78 ($50 / $1.80). This relatively high ratio suggests investors expect significant growth or place strong confidence in the company's future prospects.

The Market to Book ratio is Market Price per Share divided by Book Value per Share. Book value per share equals total equity divided by shares outstanding: $20,000 / 1,000 shares = $20.00. The market-to-book ratio is thus $50 / $20 = 2.5, indicating market valuation is 2.5 times the company's book value. This premium reflects investor expectations of future earnings and growth potential.

Comments: The high P/E and market-to-book ratios suggest investor optimism about Joe’s Fly-By-Night Oil's future, typical for firms in the energy sector which often command valuation premiums due to growth expectations and cash flow prospects.

Conclusion

The analysis indicates that Joe’s Fly-By-Night Oil Company maintains acceptable liquidity but with some caution advised due to low quick ratios. Asset utilization efficiency appears modest, reflecting the capital-intensive nature of the industry, while receivables management could be optimized. Leverage is moderate, with strong interest coverage, reducing financial risk. Profitability margins are healthy, supported primarily by profit margin contribution, with the company’s market ratios reflecting investor confidence and growth expectations. Continuous management focus on receivables, liquidity, and efficient asset utilization can support sustained performance.

References

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