Using ratios to evaluate a stock investment
Comparative financial statement data of Garfield, Inc. follow:
GARFIELD, INC
Comparative Income Statement
Years Ended December 31, 2018 and 2017
|
| 2018 | 2017 |
Net sales revenue | \(461,000 | \)424,000 |
Cost of goods sold | 241,000 | 211,000 |
Gross profit | 220,000 | 213,000 |
Operating expenses | 137,000 | 135,000 |
Income from operations | 83,000 | 78,000 |
Interest expenses | 9,000 | 13,000 |
Income before taxes | 74,000 | 65,000 |
Income tax expenses | 18,000 | 24,000 |
Net income | \(56,000 | \)41,000 |
GARFIELD, INC
Comparative Income Statement
Years Ended December 31, 2018 and 2017
|
| 2018 | 2017 | 2016 |
Assets | | | |
Current assets | | | |
Cash | \(99,000 | \)98,000 | |
Accounts receivables, Net | 108,000 | 114,000 | 107,000 |
Merchandise inventory | 146,000 | 164,000 | 202,000 |
Prepaid expenses | 20,000 | 9,000 | |
Total current assets | 373,000 | 385,000 | |
Property, plant, and equipment | 211,000 | 181,000 | |
Total assets | \(584,000 | \)566,000 | \(602,000 |
| | | |
Liabilities | | | |
Total current liabilities | \)227,000 | \(246,000 | |
Long-term liabilities | 117,000 | 100,000 | |
Total liabilities | 344,000 | 346,000 | |
| | | |
Stockholder’s equity | | | |
Preferred stock, 3% | 98,000 | 98,000 | |
Common stockholder equity, no par | 142,000 | 122,000 | 89,000 |
Total liabilities and stockholder’s equity | \)584,000 | \(566,000 | |
1. Market price of Garfield’s common stock: \)69.36 at December 31, 2018, and $38.04 at December 31, 2017.
2. Common shares outstanding: 14,000 on December 31, 2018 and 12,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
a. Current ratio
b. Cash ratio
c. Times-interest-earned ratio
d. Inventory turnover
e. Gross profit percentage
f. Debt to equity ratio
g. Rate of return on common stockholders’ equity
h. Earnings per share of common stock
i. Price/earnings ratio
2. Decide (a) whether Garfield’s ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
