Sarah Valencia, Financial ManagementNeil Gumban, Integrated Case StudyAshley Canchela,Joylen Orbigoso,Lindsay Belnas,Dan Carlo PoblacionBABA2B

a) Ratios are useful because it is utilized in order to facilitate in the evaluation the financial statements. Moreover, it will help determine the strengths and weaknesses of the company’s financial position compared to other companies. Furthermore, ratios are used in order to know the possible risks and formulate plans that can improve and enhance the company’s liquidity, profitability and financial structure. The five major categories of ratios are the Liquidity Ratios, Asset Management Ratios, Debt Management Ratios, Profitability Ratios and Market Value Ratios.

b) Current Ratio= Current AssetsCurrent Liabilities

= 1,985,8271,073,192

=1.9

Quick Ratio= Quick AssetsCurrent Liabilities

= 1,076,4481,073,192

=1.9

For the year 2007, Everlite Technology Co. had a strong liquidity

position because its current assets are significantly higher than its current liabilities. This means that the company is more than capable in paying their debts. For 2008, Everlite Technology Co. had a decrease in both current and quick ratios compared to the industry average. Basing from its Quick Ratio, its liabilities are greater than its quick assets. This is a sign of a possible trouble in the company because its quick assets may be insufficient to pay off its current liabilities. With this, we could assess that during 2008, Everlite had a weak liquidity position. For the year 2009, there is an increase in both ratios compared to 2008. Eventhough both ratios didn’t exceed the industry average, we could still assess that Everlite is regaining its liquidity position in the year 2009.

Yes, these types of analysts have an equal interest in the company’s liquidity ratio because the liquidity ratios serve as basis to determine whether or not a company has the capability to convert its assets to cash in order to pay off its debts. Moreover, the liquidity ratios shows whether the company has efficiently managed its current assets.

c)

2009 Inventory Turnover = Sales

Inventories =

2,069,032909 ,379

= 2.28x

Industry Average = 6.1x

2009 Days Sales Outstanding = Accounts Receivable

Sales =

876 ,8972 ,069 ,032

365 = 154.69 ≈

155 days

Industry Average = 56 days

2009 Fixed Assets Turnover = Sales

¿ Assets = 2 ,069 ,032313 ,097

= 6.61x

Industry Average = 9.3x

2009 Total Assets Turnover = Sales

Total Assets =

2 ,069 ,0322 ,298 ,924

= 0.90x

Industry Average = 2.1x

Everelite’s forecasted asset management ratios are stated above. When these ratios are compared against the industry’s average, it is shown that Everelite is below the standard. For example, the Inventory Turnover of Everelite is 2.28 times in a period but the desired ratio is 6.1 times, there is a difference of 3.82.

d)

2009 Debt Ratio = Total LiabilitiesTotal Assets

= 1 ,729 ,7922 ,298 ,924

= 0.7524 = 75.24%

Industry Average = 50.00%

2009 Times-Interest-Earned = EBITInterest

= 161,72627 ,434

= 5.90x

Industry Average = 6.2x

Everelite has debt, therefore they have leverage with their creditors. Everelite’s

debt ratio is 75.24% which is higher than the industry’s 50.00% by 25.24%. These ratios

show that the company has a lot of debt but they have sufficient funds to settle any

interest that may accumulate.

e)

Operating Margin = EBIT/Sales = 161,726/2,069,032

= 7.82% It means that in every dollar of sales, the company can generate 7.82% of the one-

dollar sales. The operating margin of Everelite is lower than the industry average. This figure will not make the stockholders’ happy because it just shows that the operating cost of Everelite is high. We suggest that Everelite should lower their cost for them to be able to increase their operating margin.

Profit Margin = Net Income/Sales = 80,575/2,069,032 = 3.89%

In every dollar of sales, 3.89% of that is net income. Everelite increases their profit margin from 2.89% to 3.89%. There is only 1% increase in profit margin. It’s still no good because as the projected profit increases, Everelite’s projected sales decrease. If compared to the industry average, the projected profit margin is still low and should be improve.

Basic Earning Power = EBIT/Total Assets = 161,726/2,298,924 = 7.03%

It means that only 7.03% of the total assets are needed to generate operating income. Due to low projected profit margin and turnover ratios, Everelite’s BEP ratio is lower than the industry average. Everelite is not managing its assets efficiently because based on the projected BEP ratio, only a small percentage of total assets are used to generate operating income. If only they will use their assets efficiently, their operating income will increase.

Return on Assets = Net Income/Total Assets = 80,575/2,298,924 = 3.50%

A 3.50% of ROA is not a good figure to be projected to investors. It is very low compared to the industry average which is 6.50%. One of the factors that affects the low projected return on assets is the acquisition of fixed assets that resulted to the increase in depreciation expense and resulted to low net income.

Return on Equity = Net Income/Total Equity = 80,575/569,132

= 14.16% The return on equity of Everelite is good if compared to the industry average

which is 12.00%. Also the projected return on equity of Everelite increases from 10.17% to 14.16%. The increase of the projected return on equity is due to the decrease of the projected retained earnings. Maybe portions of the 2008 retained earnings will be invest to other projects or use as a payment for debt.

f)Price/Earnings Ratio = Price per share/EPS

= 19.80/0.81 = 23.70 times

Market/Book Ratio = Market price per share/Book Value per share = 19.80/5.69 = 3.37 times

Investors expect that the stock prices of Everelite will increase. Because of the recession in 2008, the stock price of Everelite decrease by $6.2. For 2009 forecasts, the investors expect that Everelite will cope with the recession happened in 2008 and slowly regain the losses they incurred in the recession year.

The P/E Ratio shows us that the investor is willing to pay 23.70 times of book value per share. If compared to the P/E ratio in 2008, there is only a small growth mainly because of the risks involved in the company. And the company is slowly coping with the newly finished recession. Compared to the industry average, the forecasted P/E ratio is way much better because there is a great difference between the two.

The M/B Ratio of Everelite is good if compared to the industry average which is 3.00 times. It means that investors are willing to buy stocks over their book value. Because of the high M/B ratio, it explains that Everelite can survive the downs in the business because Everelite’s value in the market is much greater than their actual value and the good thing is that the investors are still willing to acquire stocks because they assumed that Everelite can stand up again from the recession and has the capability to generate income

g)

Profit Margin×Total Asset Turnover× Financial Leverage Multiplier

80,5752,069,032

×2,069,0322,298,924

×2,298,924569,132

ROA= 80,5752,069,032

×2,069,0322,298,924

=3.51%

ROE=ROA×2,298,924569,132

=14.2 %

Everlite’s Weaknesses:

Everlite is not good in its expense control because it has a Profit Margin lower than that of the Industry Average for Profit Margin. The company does not monitor its expenses extensively that because of the great amount of expenses, the Net Income tends to be at a low range.

Everlite does not utilize its assets well to generate sales. Its Total Asset Turnover is again below the Industry Average and that shows that assets were not used effectively to help the company gain sales. Thus, they have low net incomes from 2007 to 2009.

Everlite’s Strengths: Everlite’s financial statements and financial ratios don’t give out its major

strengths because of the percentages and ratios which are far below the industry average.

h)When there will be a change in Accounts Receivable, Sales will not be affected.

However, the collection period of Accounts Receivable or its DSO could affect the stock price of a company’s shares in the market. If Everlite was to lower it’s Average Collection Period or its DSO (Day Sales Outstanding), it would have an increase in its cash because of the cash being freed. Because of an addition to cash, Everlite will have the capacity to repurchase some of its stocks. It will also have the ability to invest the cash for the company to expand. It could also be that the cash is to be used as payment of debts made by the company. All of these possible actions would increase the stock price of Everlite’s shares in the current market.

i)2007 = 0.3222008 = 0.4052009 = 0.439

The management should manage and overlook the increase in the company’s inventory in a way that it should be less rapid than the increase in sales in order for the company to have a lower inventory to sales ratio. Thus, there will be a higher profit and a higher stock price.

j)If I am the credit manager, I will not continue to sell on credit rather than demand

cash on delivery even if it might cause Everlite to stop buying from the company. If I’m the bank loan officer, I will demand its repayment. If you are a creditor, you will look on the capacity of the debtor if he is able to pay the debt. The company may be able to pay the debt but it was far beyond the due, which shows that they can hardly say their debt. It is also shown in their ratio analysis that they have a high debt ratio that puts the company

in a risky situation. Thus, it is also risky for creditors to lend money in an unsure company.

k)Some potential problems and limitations in using financial ratio are as follows:

Ratio analysis is more useful for narrowly focused firms than for multidivisional ones.

Attaining average performance is not necessarily good because most firms want to be better than average. As a target for a high-level performance, it is best to focus on the industry leaders’ ratio.

Inflation has distorted many firms’ balance sheets. Therefore, a ratio analysis for one firm over time or a comparative analysis of firms of different ages must be interpreted with care and judgment.

Seasonal factors can also distort a ratio analysis. Firms can employ “Window Dressing” (techniques employed by firms to make

their financial statements look better than they really are). Different accounting practices can distort comparisons. It is difficult to generalize about whether a particular ratio is “good” or “ bad.” Firms often have some ratios that look “good” and others that look “bad”, making

it difficult to tell whether the company is on balance, strong or weak.

l)Some qualitative factors that analysts should consider when evaluating a

company’s future financial performance are as follows: Are the company’s revenues tied to one key customer? If so, the company’s

performance may decline dramatically if the customer goes elsewhere . On the other hand, if the customer has no alternative to the company’s product, this might actually stabilizes sales.

To what extent are the company’s revenues tied to one key product? To what extent does the company rely on a single supplier? What percentage of the company’s business is generated overseas? How much competition does the firm face? Is it necessary for the company to continually invest in research and

development? If so, its future prospects will depend critically on the success of new products in the pipeline and;

Are changes in laws and regulations likely to have important implications for the firm?