ACFI1001 Lecture Notes - Lecture 6: Financial Statement, Financial Ratio, Quick Ratio
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Analysis and Use of Financial StatementsProject
NIKE Inc.
https://www.sec.gov/Archives/edgar/data/320187/000032018715000113/nke-5312015x10k.htm
This assignment requires financial ratio analysis on Nike Inc.company. You will be required to examine Nike's companyâs annualreport and calculate the ratios listed below. You will calculatethe ratios for the two most recent years fromavailable annual reports.
Once you have performed an analysis of the financial statements,you will write up a report summarizing thefindings. The report will include a brief introduction,synopsis of the companyâs business and current business situation,a summary of the studentâs interpretation of teamâs analysis, and aconclusion.
Written proof of how the ratios were calculated MUST beattached to the report. You must calculate the ratiosyourself.
Use the attached work page below to show proof of yourcalculations of the ratios (show all numbers in the calculations ânot just the end result). The paper should be six (4) typedpages (not including the ratios and the ratiocalculations). Roughly, the paper should have one page ofintroduction, four pages of analysis and interpretation, and onepage of conclusion. The focus should be on the analysis and yourinterpretation.
The analysis of the financial ratios should include insightsinto the meanings behind the ratios. The ratios should tell a storyabout how the company is doing and its prospects for the future.You need to tell that story. In order to make the ratios moremeaningful, a benchmark company or industry average for each ratioshould also be included. You must calculate the benchmark companyâsratios as well. I do not need these calculations attached. Theconclusion should provide insight into the financial future of thecompany. An investment recommendation should also be made in theconclusion.
Required ratios:
Liquidity Ratios and Asset Utilizationratios:
Current Ratio
Quick Ratio
Accounts receivable turnover
Inventory turnover
Average collection period
Total assets turnover
Fixed Asset turnover
Solvency & Leverage Ratios
Times interest earned
Debt-to-equity ratio
Debt to total assets
Fixed charge coverage
Profitability Ratios:
Profit margin ratio
Gross Margin ratio
Return on total assets
Return on common stockholdersâ equity
Evidence of Ratio Calculations
Please show your calculations of the financial rations of thecompany in the column labeled âYour Company.â You can calculate theratios by hand or attached a sheet that clearly demonstrates howyou calculated the ratio (i.e. X/Y = Z). The ratios you provide foryour competitor or industry average do not need to be calculated(you can find these on various finance websites â though you willmost likely have to calculate some yourself). Pleaseattached this sheet to the back of your writtenproject.
Ratio | Your Company | Competitor/Industry Avg. |
Current Ratio | ||
Quick Ratio | ||
A/R Turnover | ||
Inventory Turnover | ||
Average collection period | ||
Total Assets Turnover | ||
Fixed Asset turnover | ||
Times-interest Earned Ratio | ||
Debt-to-Equity Ratio | ||
Fixed charge coverage | ||
Profit Margin Ratio | ||
Gross Margin Ratio | ||
Return-on-Total Assets Ratio | ||
Return-on-Common Stockholdersâ Equity Ratio |
This term you have learned to understand a companyâs financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companyâs financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.
Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.
The bank will base its decision on the following averages for the DME industry:
| Ratio | Industry Average |
| Current ratio | 1.50 |
| Quick ratio | 0.80 |
| Receivables turnover ratio | 18.0 |
| Inventory turnover ratio | 20.0 |
| Debt to assets ratio | 0.56 |
| Profit margin | 10.25% |
The balance sheet data for Dependable DME Company follows:
| December 31, 2017 | December 31, 2016 | |
| Cash | $75,000 | $60,000 |
| Accounts receivable | 40,000 | 20,000 |
| Inventory | 30,000 | 20,000 |
| Prepaid insurance | 5,000 | 5,000 |
| Total current assets | 140,000 | 105,000 |
| Property and equipment | 600,000 | 550,000 |
| Accumulated depreciation | 140,000 | 110,000 |
| Total property and equipment | 460,000 | 440,000 |
| Total assets | $600,000 | $545,000 |
| Accounts payable | $60,000 | $60,000 |
| Other current liabilities | 40,000 | 45,000 |
| Total current liabilities | 100,000 | 105,000 |
| Bonds payable | 150,000 | 150,000 |
| Total liabilities | 250,000 | 255,000 |
| Common stock | 250,000 | 250,000 |
| Retained earnings | 100,000 | 40,000 |
| Total stockholdersâ equity | 350,000 | 290,000 |
| Total liabilities and stockholdersâ equity | $600,000 | $545,000 |
The income statement data for Dependable DME Company follows:
| Sales | $600,000 |
| Cost of goods sold | 350,000 |
| Gross profit | $250,000 |
| Operating expenses | 100,000 |
| Operating income | $150,000 |
| Interest expense | 25,000 |
| Income before taxes | $125,000 |
| Income tax expense | 65,000 |
| Net income | $60,000 |
Required:
Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.
You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)
Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)
Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)
In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)
