Reference no: EM131441487

Question: Gardems was recently hired as a financial analyst by Taylor, Inc., which is a Pennsylvania based company. His first task is to conduct a financial statement analysis of firm covering the past 2 years.

Balance Sheets	2012	2011
Cash	$52,000	57,600
Accounts receivable	402,000	351,200
Inventory	836,000	715,200
Total current assets	$1,290,000	$1,124,000
Gross fixed assets	$527,000	$491,000
Less:  Accumulated depreciation	166,200	146,200
Net fixed assets	$360,800	344,800
Total assets	$1,650,800	$1,468,800
Accounts payable	$175,200	$145,600
Notes payable	225,000	200,000
Accruals	140,000	136,000
Total current liabilities	$540,200	$481,600
Long-term debt	424,612	$323,432
Common stock	460,000	460,000
Retained earnings	225,988	203,768
Total equity	$685,988	$663,768
Total Claims	$1,650,800	$1,468,800
INCOME STATEMENTS
Sales	$3,850,000	$3,432,000
Cost of goods sold	3,250,000	2,864,000
Other expenses	430,300	340,000
Depreciation	20,000	18,900
EBIT	$ 149,700	$209,100
Interest expense	76,000	62,500
EBT	$73,700	146,600
Taxes (40%)	29,480	58,640
Net income	$44,220	$87,960
OTHER DATA
December 31 stock price	$6.00	$8.50
Number of shares outstanding	100,000	100,000
Dividend per share	$0.22	$0.22
Annual lease payment	$40,000	$40,000
Earnings per share	$0.442	$0.880

Gardems also developed the following industry average data for 2012:

Ratio	Industry Average
Current	2.7
Quick	1.0
Inventory Turnover	7.0
Days sales outstanding (DSO)	32.0 days
Fixed asset turnover	10.7
Total asset turnover	2.6
Debt ratio	50.0%
Times Interest Expense	2.5
Profit margin	3.5%
Basic earning power	19.1%
ROA	9.1%
ROE	18.2%
P/E	14.2

How should Gardems interpret this financial information?

Gardems is thinking along the following lines on this case

a. Prepare an executive summary of your findings.

b. Prepare a statement of cash flows for the firm for 2012.

c. Assess the firm's liquidity position.

d. How do the firm's asset management ratios stack up against the industry averages?

e. Calculate firm's profitability ratios.

f. Apply the Du Pont analysis to 2012 and 2011 data to obtain a general overview of the firm's financial
condition.

Gardems thinks that financial statement analysis can provide some useful information concerning a company's operations and financial conditions, yet it does have some inherent problems and limitations that necessitate care and judgement. Discuss the most important of these problems and limitations.