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Homework answers / question archive / Parker Corporation is a machinery manufacturing company located in Morganton, NC, USA
Parker Corporation is a machinery manufacturing company located in Morganton, NC, USA. The company's management wanted to evaluate their financial performance by applying key financial ratios. a) Using the latest financial statements (Table 1) calculate the following performance measures: (0.5 pts each) 1. Current ratio 2. Quick ratio 3. Days' sales in receivables 4. Total asset turnover 5. Debt ratio 6- ROE 7- Price-earnings ratio b) Interpret the results by comparing it with the industry average (Table 2) (3.5 pts) Table 1: Financial Statements Parker Corporation Financial Statements For the year eaded December 31, 2019 Balance Sheet Income Statement Asses Cash $184,000 Sales $7.200,000 Accounts receivable 320,000 Coul of goods sold (3.640,000 Inventory 440.000 Operating expense (2.520,000 Net fixed assets 1.800,000 Operating profit 1,040,000 52744000 Interest expense (160.000) Income taxes (144,000) Liabilities and owners' equity Net Income $$16.000 Accounts payable $160,000 Long-term Notes payable 160.000 Long term debit 364.000
... Table 1: Financial Statements Parker Corporation Financial Statements For the year ended December 31, 2019 Balance Sheet Income Statement Assets Cash $184.000 Sales $7.200,000 Accounts receivable 320,000 Cost of goods sold (3.640,000) Inventory 410.000 Operating expense 2.520.000) Net fixed assets 1.800.000 Operating profit 1.000.000 Total assets $2.744.000 Interest expense (160.000) Income taxes (344,000) Liabilities and owners' equity Net income Accounts payable S160,000 Long term Notes payable 360,000 Long-term debt 864.000 Farnings Per Share 1.76 Owners' Equity 1.360.000 Total liabilities and owner's equity $2.744.000 Market price per share 25 Table 2: Industry Average Industry Average 64 Ratio Current Ratio Quick Ratio Days Sales in Receivables Total asset turnover Debt Ratio ROE Price-eamings ratio 14 Days 2.85 4533 13.9%
a)
1) current ratio (CR)= current assets/current liabilities
Current assets = 184000 + 320000 + 440000 = 944000
CR = 944000/160000
CR = 5.9 times
2) Quick ratio (QR) = (Current assets - inventory)/current liabilities
QR = (944000 - 440000)/160000
QR = 3.15 times
3)Days sale in Receivable = (account receivable/total credit sales)* No. Of days
Days sale in Receivable = (320000/7200000)*365
Days sale in Receivable = 16 days
Assuming sales as total credit sales because nothing is mentioned in question.
4) Total asset ratio = Net sales/Average total assets
Average total assets = total assets/2
Average total assets = 2744000/2 = 1372000
Total asset ratio = 7200000/1372000
Total asset ratio = 5.25 times
5) Debt Ratio = (Total liabilities/total assets)*100
Total liabilities = accounts payable + long term notes payable + long term debt
Total liabilities = 160000+360000+864000
= 1384000
Debt ratio = (1384000/2744000)*100
Debt ratio = 50%
6) Return on Equity = (Net income/Shareholders equity)*100
Return on equity = (536000/1360000)*100
Return on equity = 39.41%
7) Price earning Ratio = Share price/Earning per share
P/E Ratio = 25/1.76
P/E Ratio = 14.20 times
b) Liquidity ratios helps us to know how frequently we can convert our assets into cash.
It includes current ratio and quick ratio.
Current ratio of industry of 6.4 is slightly more better than the company 5.9.
Quick ratio helps us in knowing that we can pay the current liabilities without touching inventory or not. So in this situation also industry average of 3.80 is slightly better than 3.15 but both industry and company is properly able to pay the current liabilities.
Days sale in Receivable helps to know that in how many time period the company can collect the money through debtors. So in this case also industry collection period is slightly better because they are getting money within 14 days and the company is getting the money in 16 days, and remember that each and every day counts in business.
Total asset turnover ratio helps the company that how much efficiently they are using their assets to generate revenue. Higher the asset turnover ratio higher the chances of better utilisation of assets. So in this case it is clearly visible that the company ratio of earning revenue from its assets is really good(5.25) compared to industry (2.85)
Debt Ratio simply means that how much companies assets are financed by debt. Higher than or equal to 1 than it means debt is used more to buy assets and if it's lower than 1 equity is used more to get assets. So company is having 0.50 debt ratio which is really good because they are using more equity and less debt which is a really good sign compared to industry average which is 0.60.
Return on equity of industry is better than the company because industry is having 45.33% return on equity compared to company 39.41%. And this simply means that industry average is providing more return on equity to their shareholders.
Price earning Ratio is used by investors to analyse that if the share price is accurately representing projected earnings. Higer P/E Ratio means that the investors are expecting higher earning growth then before i.e. company P/E Ratio is better than the industry because they are getting 14.20 times earning compared to industry 13.9
