Date Section 1: Vertical Analysis (Common Size Analysis) Perform a vertical analysis in relation to revenue for the items on the income statement only for each of the two companies. (18 marks) Section 2: Ratio Analysis Compute the ratios for the following categories for each company: • Profitability • Liquidity • Solvency • market value Present in chart form and show calculations used. (36 marks) Discussion of ratios (46 marks) For each ratio, students should comment on some of the following • What is the relative position of each of the corporations? • What is being measured? • What does it mean? Is this good news or bad Section 3: Conclusions/Recommendations Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all of the analyses. The conclusions/recommendations must address the following as a comparison between the two companies. • Summarize the overall strengths and weaknesses of each corporation? • Your final recommendation as to which company your client should invest in explaining key reasons why it is the better choice. Bailey Ltd. Balance Sheet As at December 31, 2016 Cash $66,000 Accounts Receivable(net) *** 241,000 Inventory 87,000 Prepaid Expenses 12,000 Plant and Equipment(net) 792,000 $1,198,000 Accounts Payable & Accrued Liabilities $191,000 Long-term Debt 635,000 Common Shares** 50,000 Retained Earnings 322,000 $1,198,000 Bailey Ltd. Income Statement For the year ended December 31, 2016 Sales * $2,797,000 Cost of Goods Sold 1,790,000 Gross Margin 1,007,000 Operating Expenses 770,000 Depreciation Expense 37,000 Operating Income 200,000 Interest Expense 70,000 Income before Income Tax 130,000 Income Tax Expense 52,000 Net Income(Loss) $78,000 ** Avg. common shares issued and outstanding 22,000 shares *** A/R for 2015 was $230,000 Equity for 2015 was $310,000 total assets for 2015 was $1,050,000 inventory for 2015 85,000 dividend 2016 60,000 Snoopy Ltd. Balance Sheet As at December 31, 2016 Cash $27,000 Accounts Receivable(net)*** 262,000 Inventory 110,000 Prepaid Expenses 7,000 Plant and Equipment(net) 704,000 $1,110,000 Accounts Payable & Accrued Liabilities $173,000 Long-term Debt 310,000 Common Shares** 200,000 Retained Earnings 427,000 $1,110,000 ** Avg. common shares issued and outstanding 25,000 shares *** A/R for 2015 was 230,000 Equity for 2015 was $620,000 Total assets for 2015 was 1,000,000 inventory for 2015 112,000 dividend 2016 55,0 Bailey Ltd. Balance Sheet As at December 31, 2016 Cash $66,000 Accounts Receivable(net) *** 241,000 Inventory 87,000 Prepaid Expenses 12,000 Plant and Equipment(net) 792,000 $1,198,000 Accounts Payable & Accrued Liabilities $191,000 Long-term Debt 635,000 Common Shares** 50,000 Retained Earnings 322,000 $1,198,000 Bailey Ltd. Income Statement For the year ended December 31, 2016 Sales * $2,797,000 Cost of Goods Sold 1,790,000 Gross Margin 1,007,000 Operating Expenses 770,000 Depreciation Expense 37,000 Operating Income 200,000 Interest Expense 70,000 Income before Income Tax 130,000 Income Tax Expense 52,000 Net Income(Loss) $78,000 ** Avg. common shares issued and outstanding 22,000 shares *** A/R for 2015 was $230,000 Equity for 2015 was $310,000 total assets for 2015 was $1,050,000 inventory for 2015 85,000 dividend 2016 60,000 Snoopy Ltd. Balance Sheet As at December 31, 2016 Cash $27,000 Accounts Receivable(net)*** 262,000 Inventory 110,000 Prepaid Expenses 7,000 Plant and Equipment(net) 704,000 $1,110,000 Accounts Payable & Accrued Liabilities $173,000 Long-term Debt 310,000 Common Shares** 200,000 Retained Earnings 427,000 $1,110,000 ** Avg. common shares issued and outstanding 25,000 shares *** A/R for 2015 was 230,000 Equity for 2015 was $620,000 Total assets for 2015 was 1,000,000 inventory for 2015 112,000 dividend 2016 55,000 * all Sales made on credit Snoopy Ltd. Balance Sheet As at December 31, 2016 Cash $27,000 Accounts Receivable(net)*** 262,000 Inventory 110,000 Prepaid Expenses 7,000 Plant and Equipment(net) 704,000 $1,110,000 Accounts Payable & Accrued Liabilities $173,000 Long-term Debt 310,000 Common Shares** 200,000 Retained Earnings 427,000 $1,110,000 ** Avg. common shares issued and outstanding 25,000 shares *** A/R for 2015 was 230,000 Equity for 2015 was $620,000 Total assets for 2015 was 1,000,000 inventory for 2015 112,000 dividend 2016 55,000 * all Sales made on credit Snoopy Ltd. Income Statement For the year ended December 31, 2016 Sales * $2,454,000 Cost of Goods Sold 1,594,000 Gross Margin 860,000 Operating Expenses 632,000 Depreciation Expense 31,000 Operating Income 197,000 Interest Expense 43,000 Income before Income Tax 154,000 Income Tax Expense 62,000 Net Income(Loss) 92,000 * all Sales made on credit Ratios to use Profitability Gross profit margin Gross profit ÷ Sales Revenue (Net sales) EBIT Earnings before Interest & Tax – Net Income + Interest + Inc. Taxes EBIT to percentage of sales EBIT ÷ Sales Revenue (Net sales) Net profit margin Net income ÷ Sales Revenue (Net sales) Return on equity Net income ÷ avg Total shareholders equity Return on assets Net income ÷ avg. Total assets Asset turnover Sales Revenue (Net sales) ÷ avg. total assets Liquidity (short-term) Current ratio Current assets ÷ current liabilities quick ratio (cash + s/t investments + A/R) ÷ current liabilities DSO (avg. A/R ÷ net credit sales ) × 365 ART Net credit sales ÷ avg. A/R Inventory days on hand (avg. inventory ÷ CoGs ) × 365 inventory turnover CoGs ÷ avg. inventory Solvency (long-term) Interest coverage EBIT ÷ interest expense debt to equity ratio Total liabilities ÷ Total shareholders’ equity Debt to assets Total liabilities ÷ Total Assets Market value Book value per share (shareholders equity – preferred equity) ÷ # common shares outstanding dividend payout Dividends paid in a year ÷ net income EPS (net income – preferred dividend) ÷ wtd avg # common shares Financial Statement Analysis You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment. As a financial analyst you will prepare a prospectus. A prospectus is a short description of the analysis and must include the following sections: 1. Title page 2. Vertical Analysis 3. Ratio Analysis 4. Conclusions/Recommendations Your prospectus should be no more than 5 pages typed not including the title page. Ratios to use Profitability Gross profit margin Gross profit ÷ Sales Revenue (Net sales) EBIT Earnings before Interest & Tax – Net Income + Interest + Inc. Taxes EBIT to percentage of sales EBIT ÷ Sales Revenue (Net sales) Net profit margin Net income ÷ Sales Revenue (Net sales) Return on equity Net income ÷ avg Total shareholders equity Return on assets Net income ÷ avg. Total assets Asset turnover Sales Revenue (Net sales) ÷ avg. total assets Liquidity (short-term) Current ratio Current assets ÷ current liabilities quick ratio (cash + s/t investments + A/R) ÷ current liabilities DSO (avg. A/R ÷ net credit sales ) × 365 ART Net credit sales ÷ avg. A/R Inventory days on hand (avg. inventory ÷ CoGs ) × 365 inventory turnover CoGs ÷ avg. inventory Solvency (long-term) Interest coverage EBIT ÷ interest expense debt to equity ratio Total liabilities ÷ Total shareholders’ equity Debt to assets Total liabilities ÷ Total Assets Market value Book value per share (shareholders equity – preferred equity) ÷ # common shares outstanding dividend payout Dividends paid in a year ÷ net income EPS (net income – preferred dividend) ÷ wtd avg # common shares Financial Statement Analysis You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment. As a financial analyst you will prepare a prospectus.