The Balance Sheet And Income Statement For K

The Balance Sheet And Income Statement Shown Below Are For Kryloc Inc

The balance sheet and income statement shown below are for Kryloc Inc. You will find that the firm has no amortization charges. It also does not lease any assets and none of its debt must be retired during the next 5 years. The notes payable will be rolled over.

Balance Sheet (Millions of $)

  • Assets
  • Cash and securities: $2,500
  • Accounts receivable: $11,500
  • Inventories: $16,000
  • Total current assets: $30,000
  • Net plant and equipment: $20,000
  • Total assets: $50,000
  • Liabilities and Equity
  • Accounts payable: $9,500
  • Notes payable: $7,000
  • Accruals: $5,500
  • Total current liabilities: $22,000
  • Long-term bonds: $15,000
  • Total debt: $37,000
  • Common stock: $2,000
  • Retained earnings: $11,000
  • Total common equity: $13,000
  • Total liabilities and equity: $50,000

Income Statement (Millions of $)

  • Net sales: $87,500
  • Operating costs except depreciation: $81,813
  • Depreciation: $1,531
  • EBIT: $4,156
  • Less interest: $1,375
  • EBT: $2,781
  • Taxes: $973
  • Net income: $1,808

Other data:

  • Shares outstanding: 500 million
  • Common dividends: $632.73 million
  • Interest rate on notes payable & L-T bonds: 6.25%
  • Federal plus state income tax rate: 35%
  • Year-end stock price: $43.39

Paper For Above instruction

Analyzing the financial health and performance of Kryloc Inc. requires examining its liquidity, efficiency, leverage, profitability, and valuation metrics. Based on the provided balance sheet and income statement data, this paper calculates eleven key financial ratios and indicators, each offering insights into different aspects of the firm's financial standing.

1. Current Ratio

The current ratio measures a company's ability to meet its short-term obligations with its short-term assets. It is calculated as:

Current Ratio = Current Assets / Current Liabilities = $30,000 / $22,000 ≈ 1.36

This indicates that Kryloc Inc. has $1.36 in current assets for every dollar of current liabilities, suggesting adequate liquidity.

2. Quick Ratio (Acid-test Ratio)

The quick ratio refines liquidity assessment by excluding inventories and other less liquid current assets:

Quick Assets = Current Assets - Inventories = $30,000 - $16,000 = $14,000

Quick Ratio = $14,000 / $22,000 ≈ 0.64

This suggests Kryloc's immediate liquidity position is weaker, as it has less than one dollar in liquid assets per dollar of current liabilities.

3. Days Sales Outstanding (DSO)

DSO measures the average number of days it takes to collect receivables. It's calculated as:

DSO = (Accounts Receivable / Net Sales) 365 = ($11,500 / $87,500) 365 ≈ 48 days

Kryloc Inc. takes approximately 48 days to collect receivables, reflecting its collection efficiency.

4. Total Assets Turnover

This ratio indicates how efficiently the company utilizes its assets to generate sales:

Total Assets Turnover = Net Sales / Total Assets = $87,500 / $50,000 = 1.75

On average, Kryloc generates $1.75 in sales for every dollar of assets.

5. Inventory Turnover Ratio

The inventory turnover ratio shows how many times inventory is sold and replaced over a period:

Inventory Turnover = Cost of Goods Sold / Inventories

Operating costs (excluding depreciation) are given as $81,813 million, which likely approximate the cost of goods sold (COGS). Assuming so:

Inventory Turnover = $81,813 / $16,000 ≈ 5.11

This indicates goods are sold and replenished approximately 5.11 times per year.

6. Times Interest Earned (TIE) Ratio

This measures the firm's ability to meet interest obligations from its EBIT:

TIE = EBIT / Interest = $4,156 / $1,375 ≈ 3.02

This shows Kryloc's EBIT covers interest expenses about three times, indicating moderate leverage risk.

7. Debt/Assets Ratio

This ratio assesses the proportion of assets financed by debt:

Debt/Assets = Total Debt / Total Assets = $37,000 / $50,000 = 0.74 or 74%

This high leverage suggests significant reliance on debt financing.

8. Return on Assets (ROA)

ROA indicates how efficiently assets generate net income:

ROA = Net Income / Total Assets = $1,808 / $50,000 ≈ 3.62%

The firm yields a modest return on its assets.

9. Return on Equity (ROE)

ROE measures profitability relative to shareholders' equity:

ROE = Net Income / Equity = $1,808 / $13,000 ≈ 13.91%

This suggests Kryloc's shareholders are earning about 13.91% on their investment.

10. Dividends Per Share (DPS)

Dividends per share are calculated as:

DPS = Total Dividends / Number of Shares = $632.73 million / 500 million ≈ $1.265 per share

11. Earnings Per Share (EPS)

EPS measures net income attributable to each share:

EPS = Net Income / Shares Outstanding = $1,808 million / 500 million ≈ $3.62

12. Price-to-Earnings (P/E) Ratio

The P/E ratio reflects investor expectations:

P/E = Stock Price / EPS = $43.39 / $3.62 ≈ 12

Investors are willing to pay approximately 12 times earnings for Kryloc's shares.

13. Book Value Per Share

This metric indicates the net asset value per share:

Book Value Per Share = Total Equity / Shares Outstanding = $13,000 million / 500 million = $26 per share

Conclusion

The financial analysis of Kryloc Inc. reveals a company with adequate liquidity but moderate short-term liquidity, as evidenced by the current and quick ratios. Its efficiency ratios show reasonable asset utilization, though there is room for improvement in inventory management. The leverage ratios indicate high debt levels, which could pose risks under adverse conditions, but the firm maintains a healthy interest coverage ratio. Profitability metrics suggest moderate returns to shareholders, with EPS and ROE reflecting a positive, albeit modest, profit margin. The valuation ratios imply that investors have moderate expectations for future growth. Overall, Kryloc Inc. exhibits a stable financial position, but its high leverage and liquidity ratios should be monitored to safeguard against operational or financial distress.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th ed.). Pearson.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley & Sons.
  • Higgins, R. C. (2018). Analysis for Financial Management (12th ed.). McGraw-Hill Education.
  • Ross, S. A., & Westerfield, R. W. (2017). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Brigham, E. F., & Daves, P. R. (2018). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Fraser, L. M., & Ormiston, A. (2016). Understanding Financial Statements. Pearson.
  • Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.

Related Assignments