Chapter 15: Q3RQ (page 835)
Question: What is horizontal analysis, and how is a percentage change computed?
Answer
It was used for the analysis of horizontal data over the last years to make decisions.
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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.
Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.
Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.
MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018 | |||
Dollars in thousands | 2019 | 2018 | 2017 |
Net Sales Revenue | \( 181,000 | \) 160,000 | |
Cost of Goods Sold | 93,500 | 86,500 | |
Selling and Administrative Expenses | 45,000 | 40,500 | |
Interest Expense | 8,000 | 12,000 | |
Income Tax Expense | 11,000 | 10,500 | |
Net Income | \( 23,500 | \) 10,500 | |
Additional data: | |||
Total Assets | \( 209,000 | \) 187,000 | \( 167,000 |
Common Stockholders’ Equity | 96,000 | 91,500 | 80,500 |
Preferred Dividends | 2,000 | 2,000 | 0 |
Common Shares Outstanding During the Year | 15,000 | 15,000 | 10,000 |
Requirements
Grand Oaks Realty’s net revenue & net income for the following five-year period using 2015 as the base year, follow:
Requirement:
Compute a trend analysis for the net revenue & net income. Round to the nearest full percent.
Which grew faster during the period, net revenue or the net income?
Completing a comprehensive financial statement analysis
In its annual report, ABC Athletic Supply, Inc. includes the following five-year financial summary:
| ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Sales Revenue | \(250,000 | \)216,000 | \(191,000 | \)161,000 | \(134,000 | |
Net Sales Revenue Increase | 16% | 13% | 19% | 20% | 17% | |
Domestic Comparative Store Sales Increase | 5% | 6% | 4% | 7% | 9% | |
Other Income—Net | 2,110 | 1,840 | 1,760 | 1,690 | 1,330 | |
Cost of Goods Sold | 189,250 | 164,592 | 148,216 | 126,385 | 106,396 | |
Selling and Administrative Expenses | 41,210 | 36,330 | 31,620 | 27,440 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,080) | (1,380) | (1,400) | (1,020) | (830) | |
Interest Income | 125 | 165 | 155 | 235 | 190 | |
Income Tax Expense | 4,470 | 3,900 | 3,700 | 3,320 | 2,700 | |
Net Income | 16,225 | 11,803 | 7,979 | 4,760 | 3,054 | |
Per Share of Common Stock: | ||||||
Net Income | 1.60 | 1.30 | 1.20 | 1.00 | 0.78 | |
Dividends | 0.40 | 0.38 | 0.34 | 0.30 | 0.26 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \)30,700 | \(27,200 | \)26,700 | \(24,400 | \)21,500 | |
Merchandise Inventory | 24,500 | 22,600 | 21,700 | 19,000 | 17,500 | $16,700 |
Property, Plant, and Equipment, Net | 51,400 | 45,200 | 40,000 | 35,100 | 25,600 | |
Total Assets | 106,600 | 95,000 | 88,400 | 78,500 | 64,600 | |
Current Liabilities | 32,300 | 28,000 | 28,300 | 25,000 | 16,500 | |
Long-term Debt | 23,000 | 21,500 | 17,600 | 19,100 | 12,000 | |
Stockholders’ Equity | 51,300 | 45,500 | 42,500 | 34,400 | 36,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 1.0 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 17.2% | 14.4% | 11.2% | 8.1% | 7.1% | |
Rate of Return on Common Stockholders’ Equity | 35.5% | 26.% | 20.8% | 13.5% | 13.0% | |
Requirements
Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of ABC. Include the following sections in your analysis.
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