Financial Statement Analysis for Managers -Ratio Analysis

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Ratio Analysis
The Vanguard Group, Inc. has compiled the following financial statements and comparative financial
ratios for the year-end review.
Balance Sheet
Vanguard Group, Inc.
December 31, 2007
Assets
Current assets
Cash $ 118,750
Accounts receivable 296,250
Inventory 303,750
Total current assets $ 718,750
Gross fixed assets $625,000
Less: Accumulated depreciation 93,750
Net fixed assets 531,250
Total assets $1,250,000
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 111,250
Notes payable 211,250
Accruals 108,750
Total current liabilities $ 431,250
Long-term debt 235,000
Total liabilities $ 666,250
Stockholders’ equity
Common stock 318,750
Retained earnings 265,000
Total stockholders’ equity $ 583,750
Total liabilities and stockholders’ equity $1,250,000
Income Statement
Vanguard Group, Inc.
for the Year Ended December 31, 2007
Sales revenue $1,680,000
Cost of sales 1,362,480
Gross profits $ 317,520
Less: Operating expenses
Selling expense $ 125,600
General and administrative expense 81,600
Depreciation expense 24,000
Total operating expense $231,200
Operating profits $ 86,320
Less: Interest expense 15,600
Net profits before taxes $ 70,720
Less: Taxes (40%) 28,288
Net profits after taxes $ 42,432
Historical and Industry Average Ratios
Vanguard Group, Inc.
Industry Average
Ratio 2005 2006 2007 2007
Current ratio 1.6 1.7 — 1.6
Quick ratio 0.9 1.0 — 0.9
Inventory turnover 6.0 5.0 — 8.4
Average collection period 40 days 50 days — 40 days
Total asset turnover 1.5 1.5 — 1.75
Debt ratio 60% 56% — 50%
Times interest earned 2.5 3.5 — 4.0
Gross profit margin 20% 19.7% — 20%
Operating profit margin 4.7% 4.8% — 6%
Net profit margin 2.0% 2.3% — 3%
Return on investment 3.0% 3.5% — 5.25%
Return on equity 7.5% 7.95% — 10.5%
1. Calculate the firm’s 2007 financial ratios.
2. Prepare an executive summary on the firm’s overall financial condition and performance. Your
summary must be at least one page, but no more than 3 pages. Comment on the meaning of each
ratio, discussing its trend and its comparison to the industry average

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