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New Era University

CASE STUDY
EVERELITE TECHNOLOGY CO., LTD.
Financial Management
Dean Isagani Sabado

Christian Angel Buyson


Jamila De La Cruz
Hyra Pearl Porbasas
Jerico Galvez

4-BSA 1
INTEGRATED CASE
FINANCIAL STATEMENT ANALAYSIS

Everelite Technology Co., Ltd had increased service capacity and undertaken a major marketing
campaign in an attempt to “go global”. Thus far, sales have not reached the forecasted level, the
company incurred higher than projected costs, and the company recorded a huge loss for 2008 instead
of projected profits. As a result, its managers, directors, and investors are concerned about the firm’s
survival.

Robert Su, an MBA graduate from the Business School of Hong Kong University of Sciance and
Technology, received a request to join Everelite, from his uncle- Frank Su, chairman of Everelite’s board
of directors. Robert’s mission is to get Everelite beck into a sound financial position. Everelite’s 2007 and
2008 balance sheets and income statements, together with projections for 2009, are given in Tables IC 3-
1 and IC 3-2. In addition, Table IC 3-3 gives the company’s 2007 and 2008 financial ratios, together with
industry average data. The 2009 projected fincancial statement data represent Robert’s abd Frank’s best
guess for 2009 resuts, assuming that some new financing is arranged to get the company “over the
hump.”

Robert must prepare an analysis of where the company is now, what it must do to regain its financial
health, and what actions should be taken. Your assignment is to help him answer the following
questions. Provide clear explanations, not “yes or no” answers.

a.) Why are ratios useful? What are the five major categories of ratios?
b.) Calculate Everelite’s 2009 current and quick ratios based on the projected balance sheet and
income statement data. What can you say about the company’s liquidity positions in 2007, in
2008, and as projected for 2009? We often think of ratios as being useful (1) to managers’ help
run the business. (2) to bankers for credit analysis and (3) to stockholders for stock valuation.
Would these different types of analysts have an equal interest in the company’s liquidity ratios?
c.) Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and
total assets turnover. How does Everelite’s utilization of assets stack up against other firms in the
industry?
d.) Calculate the 2009 debt and times-interest-earned ratios. How does Everelite compare with the
industry with respect to financial leverage? What can you conclude from these ratios?
e.) Calculate the 2009 operating margin, profit margin, basic earning power (BEP), return on assets
(ROA), and return on equity (ROE). What can you say about these ratios?
f.) Calculate the 2009 price/earnings ratio and market/book ratio. Do these ratios indicate that
investors are expected to have a high or low opinion of the company?
g.) Use the DuPont equation to provide a summary and overview of Everelite’s financial condition
as projected for 2009. What are the firm’s major strengths and weaknesses?
h.) Use the following simplified 2009 balance sheet to show, in general terms, how an improvement
in the DSO would tend to affect the stock price. For example, if the company could improve its
collection procedures and thereby lower its DSO without affecting sales, how would that change
“ripple through” the financial statements (shown in thousands below) and influence the stock
price?

Accounts receivable $877 Debt $1,730


Other current assets 1109
Net fixed assets 313 Equity 569
Total assets $2,299 Liabilities plus equity $2,299

i.) Does it appear that inventories could be adjusted? If so, how should that adjustment affect
Everelite's profitability and stock price?
j.) In 2008, the company paid its suppliers much later than the due dates; also, it was not
maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers
could cut the company off, and its bank could refuse to renew the loan when it comes due in 90
days. On the basis of data provided, would you, as a credit manager, continue to sell to Everelite
on credit? (You could demand cash on delivery – that is, sell on terms of COD – but that might
cause Everelite to stop buying from your company.) Similarly, if you were the bank loan officer,
would you recommend renewing the loan or demand its repayment?
k.) What are some potential problems and limitations of financial ratio analysis?
l.) What are some qualitative factors that analysts should consider when evaluating a company's
likely future financial performance?
Table IC 3-1 Balance Sheets
2009 (E) 2008 2007
Assets
Cash $ 199,551 $208,323 $102,024
Accounts Receivable 876,897 690,294 824,979
Inventories 909,379 942,374 715,414
Total Current assets $1,985,827 $1,840,991 $1,642,417
Gross fixed asstes 380,510 317,503 232,179
Less accumulated depreciation 67,413 54,045 34,187
Net fixed assets $313,097 $263,458 $197,992
Total assets $2,298,924 $2,104,449 $1,840,409

Liabilities and Equity


Short-term borrowings $312,500 $288,798 $296,149
Accounts payable 650,535 636,318 414,611
Accruals 110,157 106,748 103,362
Total current liabilities $1,073,192 $1,031,864 $814,122
Long-term debt 656,600 410,769 372,931
Commin stock (100,000 shares) 550,000 550,000 550,000
Retained earnings 19,132 111,816 103,356
Total Equity $569,132 $661,816 $653,356
Total liabilities and equity $2,298,924 $2,104,449 $1,840,409
Table IC 3-2 Income Statements
2009 (E) 2008 2007

Sales $2,069,032 $2,325,967 $2,220,607


Cost of good sold 1,647,925 1,869,326 1,655,827
Other expenses 241,490 287,663 273,870
Total operating costs excluding $1,889,415 $2,156,989 $1,929,697
depreciation and amortization
Depreciation and amortization 17,891 25,363 26,341
EBIT $161,726 $143,615 $264,569
Interest Expense 27,434 31,422 13,802
EBT $134,292 $112,193 $250,767
Taxes (40%) 53,717 44,877 100,307
Net Income $80,575 $67,316 $150,460

EPS $0.81 $0.67 $1.50


DPS $1.00 $1.00 $1.42
Book value per share $5.69 $6.62 $6.53
Stock price $19.2 $15.60 $21.8
Shares outstanding 100,000 100,000 100,000
Tax rate 40% 40% 40%
Table IC 3-3 Ratio
Analysis
2009E 2008 2007 Industry
Average
Current 1.78x 2.02x 2.05x
Quick 0.87x 1.14x 1x
Inventory Turnover 2.47x 3.10x 6.1x
DSO 108.32 days 135.60 days 56 days
Fixed Asset Turnover 8.83x 11.22x 9.3x
Total Assets Turnover 1.11x 1.21x 2.1x
Debt Ratio 68.55% 64.50% 50.00%
TIE 4.57x 19.17x 6.2x
Operating Margin 6.17% 11.91% 13%
Profit Margin 2.89% 6.78% 9.00%
Basic Earning Power 6.82% 14.38% 15.00%
ROA 3.20% 8.18% 6.50%
ROE 10.17% 23.03% 12.00%
Price/ Earnings 23.17x 14.49x 10.00x
Market/ Book 2.36x 3.34x 3.00x
Book Value per share $6.62 $6.53 NA
SOLUTIONS:

a.) Why are ratios useful? What are the five major categories of ratios?

Ratios are important because it enables the business owner and managers to detect trends in
the company and to compare its performance and condition with the average performance of similar
businesses in the same industry. Ratios’ also helps us identify and quantify a company’s strengths and
weaknesses, evaluate its financial position, and understand the risks involved in the company. Ratio can
help managers implement plans that improve a company’s profitability, liquidity and financial structure.
The five major categories of ratios are; Liquidity Ratios, Asset Management Ratios, Debt
Management Ratios, Profitability Ratios and Market Value Ratios.

b.) Calculate Everelite’s 2009 current and quick ratios based on the projected balance sheet and
income statement data. What can you say about the company’s liquidity positions in 2007, in
2008, and as projected for 2009? We often think of ratios as being useful (1) to managers’ help
run the business. (2) to bankers for credit analysis and (3) to stockholders for stock valuation.
Would these different types of analysts have an equal interest in the company’s liquidity ratios?

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 1,985,827


𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = = = 1.85𝑥
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 1,073,192
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 1,985,827−909,379
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠
= 1,073,192
= 1.00𝑥

In 2007, Everelite’s current ratio is slightly below the industry average. However, its quick ratio is
higher compared to the industry average. Thus, the firm can pay their current liabilities if they will not
rely on the sale of their inventories.
In 2008, as shown in its liquidity ratios, both below the industry average, Everelite, could not be
able to meet its short term debts.
In 2009, both current and quick ratios increased relative to last year’s. However, current ratio is
lower than the industry average by .2 while its quick ratio levels the industry average. This means that
basing solely from the current and quick ratios, improvement is expected but it is safe to say that the
liquidity position of the firm is weak.
No, they don't have an equal interest in the liquidity ratio. The following are the specific reasons:
MANAGER:
Some of the most basic financial ratios show how much a business or investment will return compared
to how much it will cost. When managers are planning new projects, these financial ratios provide the
support they need to receive funding from executives to move forward. Executives like to see a high
return on investment, or ROI, based on analysis of costs and projected revenues. After projects are
completed, the same type of analysis can show the returns actually delivered, and how the investment
lived up to expectations, which is useful for future strategy.

CREDIT ANALYST:
Credit analysts will be particularly interested in the applicant's liquidity and ability to pay bills on time.
Such ratios as the quick ratio, receivables, inventory turnovers, the average payable period and debt-to-
equity ratio are particularly relevant. In addition to analyzing financial statements, the credit analyst will
consider the character of the company and its management, the financial strength of the firm, and
various other matters.

STOCKHOLDERS:
Interested only in Return On Equity (ROE), Dividend Rate, Gross Margin, Net Income Margin and
Quarterly and Annual Growth Ratios.

In general, Financial Statement Analysis is used by: a) managers to evaluate and improve performance,
b) lenders (banks and bondholders) and bond rating analysts (SP and Moody's) to evaluate the
creditworthiness of a company, and c) stockholders (current or prospective) and stock analysts, to
forecast earnings, DIV and stock price." The five types of ratios are liquidity, asset management, debt
management, profitability, and market value ratios.

c.) Calculate the 2009 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and
total assets turnover. How does Everelite’s utilization of assets stack up against other firms in the
industry?
𝑆𝑎𝑙𝑒𝑠 2,069,032
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 909,379
= 2.28x
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 876,897 876,897
𝐷𝑆𝑂 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
= 𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠/365 = 2,069,032 = 5,668.58 = 154.69 𝑑𝑎𝑦𝑠
( )
365

𝑆𝑎𝑙𝑒𝑠 2,069,032
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
= 313,097
= 6.61𝑥

𝑆𝑎𝑙𝑒𝑠 2,069,032
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = = 0.90𝑥
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 2,298,924

Inventory turnover is below the industry average and is getting worse, maybe because they have old
inventories or its control might be poor. No improvement is currently forecasted (In fact, the opposite).
The firm collects its receivables too slowly (2007: 135.60 days, 2008: 108.32 days. 2009: 154. 69 days) as
compared to the 56 days norm. This suggests the management’s poor credit policy. The company’s fixed
assets turnover declines with time, and is expected to go way lower than the industry average. This
shows that it does not use its long term assets effectively so as to generate higher sales. Total assets
turnover is not in line with other companies in the same industry. As time passes by, it continues to turn
down. This is caused by excessive current assets (Accounts Receivable/Inventory) To sum up; Everelite is
inefficiently using its assets.

d.) Calculate the 2009 debt and times-interest-earned ratios. How does Everelite compare with the
industry with respect to financial leverage? What can you conclude from these ratios?

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 1,729,792


𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 = = = 75.24%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 2,298,924
𝐸𝐵𝐼𝑇 161,726
𝑇𝑖𝑚𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑟𝑎𝑡𝑖𝑜 = = = 5.90𝑥
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 27,434

As compared to the industry average, Everelite's financial leverage is relatively higher which
means that a large fraction of their assets are primarily financed by the creditors. Since the company
uses great financial leverage, it is subject to higher risks.

e.) Calculate the 2009 operating margin, profit margin, basic earning power (BEP), return on assets
(ROA), and return on equity (ROE). What can you say about these ratios?

𝐸𝐵𝐼𝑇 161,726
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
= 2,069,032 = 7.82%
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 80,575
𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑆𝑎𝑙𝑒𝑠
= 2,069,032 = 3.89%
𝐸𝐵𝐼𝑇 161,726
𝐵𝑎𝑠𝑖𝑐 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑜𝑤𝑒𝑟 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 2,298,924 = 7.03%
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 80,575
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑅𝑂𝐴) = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 2,298,924 = 3.50%
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 80,575
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑅𝑂𝐸) = 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦
= 569.132 = 14.16%

It may be recalled that the profitability ratios bring together the asset and debt management
ratios and show their effects on ROE. Though Everelite’s operating margin, profit margin, basic earning
power and return on assets have shown improvements compared to last year’s, still, they are way lower
than the industry average. This implies the firm’s poor utilization of assets. However, its ROE is above the
industry norm. This may be attributed to the use of too much leverage which exposes the firm to a
higher risk. Using leverage does not guarantee the firm’s good results of operations. In Everelite’s case,
the use of leverage leaves the firm in a near-to-bankruptcy position.

f.) Calculate the 2009 price/earnings ratio and market/book ratio. Do these ratios indicate that
investors are expected to have a high or low opinion of the company?

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 19.20


𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= 0.80575 = 23.82𝑥
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 19.20
𝑀𝑎𝑟𝑘𝑒𝑡/𝑏𝑜𝑜𝑘 𝑟𝑎𝑡𝑖𝑜 = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= 5.69
= 3.37𝑥

Both the P/E and M/B ratio are above the industry norm. A stock with a high P/E ratio suggests
that investors are expecting higher earnings growth in the future compared to the overall market, as
investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a
generalization, stocks with this characteristic are considered to be growth stocks. The growth
investor views high P/E ratio stocks as attractive buys and low P/E stocks as flawed, unattractive
prospects
On the other hand, the firm’s high P/B ratio is often a sign that a business has rosier future
prospects than past performance. Share price is high relative to book value because investors have bid
up the share price based on expectations of better earnings and/or cash flow ahead.
g.) Use the DuPont equation to provide a summary and overview of Everelite’s financial condition
as projected for 2009. What are the firm’s major strengths and weaknesses?

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐷𝑢𝑃𝑜𝑛𝑡 𝐸𝑞𝑢𝑎𝑡𝑖𝑜𝑛) =


𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 𝑥 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑥 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐷𝑢𝑃𝑜𝑛𝑡 𝐸𝑞𝑢𝑎𝑡𝑖𝑜𝑛) = 𝑆𝑎𝑙𝑒𝑠
𝑥 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑥 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
80,575 2,069,032 2,298,924
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐷𝑢𝑃𝑜𝑛𝑡 𝐸𝑞𝑢𝑎𝑡𝑖𝑜𝑛) = 2,069,032 𝑥 2,298,924
𝑥 569,132

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐷𝑢𝑃𝑜𝑛𝑡 𝐸𝑞𝑢𝑎𝑡𝑖𝑜𝑛) = 14.16%

Strengths: The firm’s ROE shows a great increase. This indicates that managers did an effective
utilization of the resources given by stockholder by generating profits that will result to an accretion of
the investors’ equity.

Weaknesses: The firm’s liquidity position is weak; all its asset management ratios are poor); its debt
management ratios are poor and most of its profitability ratios are low (except return on equity). The
company is currently achieving low productivity from its inventory and fixed assets. It is also not
collecting from its customers as quickly as the industry. It needs to improve its sales and/or reduce
inventories and fixed assets to better match its competitors.

h.) Use the following simplified 2009 balance sheet to show, in general terms, how an improvement
in the DSO would tend to affect the stock price. For example, if the company could improve its
collection procedures and thereby lower its DSO without affecting sales, how would that change
“ripple through” the financial statements (shown in thousands below) and influence the stock
price?

Accounts receivable $877 Debt $1,730

Other current assets 1109

Net fixed assets 313 Equity 569

Total assets $2,299 Liabilities plus equity $2,299


Sales / day = $2, 069, 032 / 365 = $5, 668. 58
Reducing Accounts Receivable will have no effect on sales.

Old Accounts Receivable = $877, 000


New Accounts Receivable = $5, 668.58 x 56 days = $317, 440
Cash freed up: $ 559, 560
Initially shows up as addition to cash.

Effect of reducing receivables on balance sheet and stock price

Added Cash $560 Debt $1,730


Accounts receivable 317
Other current assets 1109
Net fixed assets 313 Equity 569
Total assets $2,299 Liabilities plus equity $2,299

Improving the company’s collection procedures without affecting sales by lowering its DSO from 154. 69
days to the 56 days industry average would result to an addition to cash. The freed up cash could be
utilized to repurchase stock, expand the business, and reduce debt. All of these actions would likely
improve the stock price.

i.) Does it appear that inventories could be adjusted? If so, how should that adjustment affect
Everelite's profitability and stock price?

The inventory turnover ratio is low. It appears that the firm either has excessive inventory or
some of the inventory is obsolete. If inventory were reduced, this would improve the current asset ratio,
the inventory and total assets turnover, and reduce the debt ratio even further, which should improve
the firm’s stock price and profitability.

j.) In 2008, the company paid its suppliers much later than the due dates; also, it was not
maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers
could cut the company off, and its bank could refuse to renew the loan when it comes due in 90
days. On the basis of data provided, would you, as a credit manager, continue to sell to Everelite
on credit? (You could demand cash on delivery – that is, sell on terms of COD – but that might
cause Everelite to stop buying from your company.) Similarly, if you were the bank loan officer,
would you recommend renewing the loan or demand its repayment?

With reference to the ratios such as quick, receivable and inventory turnover which show the
company's inability to pay off its' debts when they fall due. As a credit manager, it is unfavorable to
continue providing supplying a portion of its total funds with its current arrangement. Terms of COD
might be a little harsh and might push the firm into bankruptcy.
Likewise, if the bank demanded repayment this could also force Everelite into bankruptcy. Therefore,
renewing the loan is a preferable option.

k.) What are some potential problems and limitations of financial ratio analysis?

Many ratios are calculated on the basis of the balance-sheet figures. These figures are as on the
balance-sheet date only and may not be indicative of the year-round position. Comparing the ratios
with past trends and with competitors may not give a correct picture as the figures may not be easily
comparable due to the difference in accounting policies, accounting period etc. It gives current and past
trends, but not future trends. Impact of inflation is not properly reflected, as many figures are taken at
historical numbers, several years old. There are differences in approach among financial analysts on how
to treat certain items, how to interpret ratios etc. The ratios are only as good or bad as the underlying
information used to calculate them.

Although ratio analysis is very important tool to judge the company's performance, following are the
limitations of it. Seasonal factors can distort ratios, Window dressing techniques
can make statements and ratios look better. Different operating and accounting practices distort
comparisons. Sometimes, it is hard to tell if ratio is “good” or “bad.”
l.) What are some qualitative factors that analysts should consider when evaluating a company's
likely future financial performance?

The following are some qualitative factors that analysts should consider:
1. To what extent are the company's revenues tied to one key customer or to one key product? To
what extent does the company rely on a single supplier? Reliance on single customers, products,
or suppliers increases risk.
2. What percentage of the company company's business is generated overseas? Companies with a
large percentage of overseas business are exposed to risk of currency exchange volatility and
political instability.
3. What are the probable actions of current competitors and the likelihood of additional new
competitors?
4. Do the company's future prospects depend critically on the success of the products currently in
the pipeline or on existing products?
5. How does the legal and regulatory environment affect the company?
2009E 2008 2007 Industry Average
Current 1.85x 1.78x 2.02x 2.05x
Quick 1.00x 0.87x 1.14x 1.00x
Inventory turnover 2.28x 2.47x 3.10x 6.10x
Days sales outstanding (DSO) 154.69 days 108.32 days 135.60 days 56 days
Fixed assets turnover 6.61x 8.83x 11.22x 9.30x
Total assets turnover 0.90x 1.11x 1.21x 2.10x
Debt ratio 75.24% 68.55% 64.50% 50.00%
TIE 5.90x 4.57x 19.17x 6.20x
Operating margin 7.82x 6.16% 11.91% 13.00%
Profit margin 3.89% 2.89% 6.78% 9.00%
Basic earning power 7.03x 6.82% 14.38% 15.00%
ROA 3.50% 3.20% 8.18% 6.50%
ROE 14.16% 10.17% 23.03% 12.00%
Price/earnings 23.82x 23.17x 14.49x 10.00x
Market/book 3.37% 2.36x 3.34x 3.00x
Book value per share $5.59 $6.62 $6.53 n.a
Note: E indicates estimated. The 2009 data are forecasts.
a
Calculation is based on a 365-day year