Written Case Analysis Amfac, Inc. I. Background: The financial statements of Amfac, Inc.

are presented to be analyzed using financial ratio analysis. Additional data are as follows: - Accounts receivable and inventory remained relatively constant during the year - Beginning balances for assets totaled $250,000 and for stockholders equity amounted to $180,000 - Preferred stock did not changed during the year - There are no convertible securities II. Problem Statement: How would you interpret and analyze the financial statements of Amfac, Inc. using financial ratios? III. Objectives: Interpret the results of the financial ratios and analyze the performance of Amfac, Inc. using such indicators IV. Answers to the Requirement of the Case: a.) Current Ratio= Current Assets /Current Liabilities = 86,000 / 40,000 = 2.15 to 1 This indicates that for every one (1) dollar current liability the company has 2.15 dollars available to pay its current obligations. It could pay 2.15 times using the available current assets. A 2.15 current ratio tells us that the firm has enough current assets to meet its currently maturing obligations. Short-term creditors would like to have a high current ratio since it reduces their risks. For owners, it should not be too high for this means an excessive investment in current assets that does not produce much return for the company. But it should not be too low also because the company would find it difficult to pay current obligations when they mature. b.) Acid Test Ratio= Quick Assets/Current Liabilities = 44,000 / 40,000 = 1.1 to 1

This means that for every one (1) dollar current liability, the company has 1.1 dollars available liquid assets to settle the current obligation. The ratio indicates that the company has the ability to satisfy current liabilities with its liquid assets in the near term. c.) Debt-to-Equity Ratio= Total Liabilities/Total Stockholders Equity = 100,000 / 200,000 = .50 to 1 This ratio tells us that the majority of the companys resources are financed by owners than creditors. A debt-to-equity ratio of .50 is less risky because of a lesser debt it has. d.) Accounts Receivables Turnover in Days= Accounts Receivables Annual Credit Sales/360 = 36,000/ (450,000 / 360) = 28.8 Days This tells us that the average number of days during which the company must wait before receivables are collected is 28.8 days. The shorter the number of days, the better because it will be an indication of the firms efficiency in collecting its receivables. Also, it would be better to compare the accounts receivable turnover in days against the credit terms for meaningful evaluation. In this case, if the company grants a credit term of 30 days or more, 28.8 days will indicate a satisfactory performance. But if it grants credit terms below 28.8 days, then we can conclude a poor performance for the credit and collection department. e.) Inventory Turnover = Cost of Goods Sold/Average Inventory = 270,000 / 40,000 = 6.75 times

This indicates that the inventory were acquired and sold 6.75 times during the period. A lot of factors are to be considered in determining the desirability of inventory turnover. If it becomes too high, there is possibility of running out of stocks, which may result into losing some customers. If it is too low, it means a company is keeping in stock inventory for a long period, which entails additional costs. f.) Times Interest Earned= Earnings Before Interest and Taxes Interest Expense = 51,000/ 6,000 = 8.50 times

This tells us that the company was able to earn operating income that is 8.50 times as much as the required interest payments on its liabilities. The company can afford to pay all its expenses, including interest expense, and still have large amount left for net income which is therefore satisfactory. g.) Return on Assets= Net Income + Interest Expense, net of tax Average Total Assets = 35,700 / 275,000 = 13% This tells us that a 13% income have been generated from the use of the companys assets. To have a meaningful evaluation, this may be compared with the ROA of other firms in the same industry or the companys desired rate of return. The higher the ROA, the better. h.) Return on Common Stockholders Equity = Net Income Preferred Dividends Average Common Stockholders Equity = 31,500 / 140,000 = 23% This shows a 23% earnings on the common stockholders (owners) investment. This is an indication that the company is performing well by having a high profitability ratio on the investment contributed by its owners.