Ratio Analysis Case

One of the majority shareholder of BREW Products has forced the company to hold debt to a minimum. Net income each year has been approximately P8,200,000. A summary balance sheet for a typical year is:

Current assets P80,000,000Plant and equipment (net) 40,000,000 Total assets P120,000,000Current liabilities 30,000,000Shareholders’ equity 90,000,000 Total liabilities and shareholders’ equity P120,000,000

A member of the board, Carla Fredo, is irritated with such a cautious policy. “We would be better off to liquidate and invest in government securities,” she protests. She states that with new product lines and an aggressive sales stance, net income could easily grow to P15,000,000 a year. She admits that P30,000,000 in additional assets would be needed and states, “The additional assets should be financed by long-term notes.” Other balance sheet relationships would remain unchanged.

Comment on the current and the proposed strategies. What is(are) your recommendation(s)

Hint: Compare the current ROA and ROCE with the proposed ROA and ROCE by Ms. Fredo.