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ECON 3A Lecture Notes - Lecture 16: Inventory Turnover, Working Capital, Current Liability

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pinkhedgehog498
13 Mar 2019
School
UCSB
Department
Economics
Course
ECON 3A
Professor
Anderson

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Document Summary

Liquidity ratios (how strong are you right now) Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers. Solvency ratios (how strong will you be later on) Measure the ability of the enterprise to survive over a long period of time. Long-term creditors and stockholders- particularly with respect to ability to make principle and interest payments. Measure the income or operating success of an enterprise for a given period of. Its ability to obtain debt and equity financing. If extremely profitable, can be both liquid and solvent. Principle valuation of a stock starts with the income statement then compares balance sheet to the market. Why does it make sense to convert items on the statements to per share . Unless you own all the stock of a company, you would like to see activity converted to the basis at which you made your purchase.

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Related Questions

Problem 3-14
Comprehensive Ratio Analysis

The Jimenez Corporation's forecasted 2014 financial statements follow, along with some industry average ratios.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014

Assets  
Cash $ 72,000
Accounts receivable 439,000
Inventories 894,000
Total current assets $1,405,000
Fixed assets 431,000
Total assets $1,836,000
Liabilities and Equity  
Accounts payable $ 332,000
Notes payable 100,000
Accruals 170,000
Total current liabilities $ 602,000
Long-term debt 404,290
Common stock 575,000
Retained earnings 254,710
Total liabilities and equity $1,836,000

Jimenez Corporation: Forecasted Income Statement for 2014

Sales $4,290,000
Cost of goods sold 3,580,000
Selling, general, and administrative expenses 370,320
Depreciation and amortization 159,000
Earnings before taxes (EBT) $ 180,680
Taxes (40%) 72,272
Net income $ 108,408
Per Share Data  
EPS $ 4.71
Cash dividends per share $ 0.95
P/E ratio of 5.0
Market price (average) $ 23.57
Number of shares outstanding 23,000
Industry Financial Ratios (2013)*  
The quick ratio of 1.0
The current ratio of 2.7
Inventory turnover** 7.0
Days sales outstanding*** 32.0 days
Fixed assets turn over** 13.0
Total assets turnover** 2.6
Return on assets 9.1%
Return on equity 18.2%
The profit margin on aales of 3.5%
Debt-to-assets ratio 21.0%
Liabilities-to-assets ratio 50.0%
   
P/E ratio of 6.0
Price/Cash flow ratio of 3.5
Market/Book ratio of 3.5
*Industry average ratios have been constant for the past 4 years.
**Based on year-end balance sheet figures.
***Calculation is based on a 365-day year.

Calculate Jimenez's 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses. Assume that there are no changes from the prior period to any of the operating balance sheet accounts. Round DSO to the nearest whole number. Round the other ratios to one decimal place.

Ratios Firm Industry Comment
Quick ratio   1.0 -Select-Strong Weak Item 2
Current ratio   2.7 -Select-Strong Weak Item 4
Inventory turnover   7.0 -Select-Poor Rich Item 6
Days sales outstanding days 32 days -Select-Poor Rich Item 8
Fixed assets turnover   13.0 -Select-Poor Rich Item 10
Total assets turnover   2.6 -Select-Poor Rich Item 12
Return on assets % 9.1% -Select-Bad Good Item 14
Return on equity % 18.2% -Select-Bad Good Item 16
The profit margin on sales % 3.5% -Select-Bad Good Item 18
Debt ratio % 21.0% -Select-Low High item 20
Liabilities-to-assets % 50.0% -Select-Low High Item 22
EPS $4.71 n.a. --
Stock Price $23.57 n.a. --
P/E ratio   6.0 -Select-PoorRich Item 24
P/CF ratio   3.5 -Select-PoorRich Item 26
M/B ratio   n.a. --

So, the firm appears to be -Select-badly good item 28 managed

*Article*

The U.S. economy is revving up just as Europe and other major economies lose steam, jeopardizing a rare period in which the world’s largest economies have been accelerating in unison.

The European Central Bank on Thursday took another step toward ending the massive stimulus measures it has used in an effort to boost growth since 2015. But ECB officials also said they would hold interest rates steady through summer next year, a sign that they felt the eurozone economy remains fragile.

In an indication of growing economic vigor in the U.S., the Federal Reserve on Wednesday tapped the brakes again, raising the benchmark interest rate by a quarter of a percentage point and signaling it may quicken the pace of future rate increases because of a strengthening economy and tightening labor markets.

The economies’ diverging paths were expressed most prominently in the euro, which on Thursday suffered its worst day against the dollar in two years. The euro lost 1.88% against the U.S. currency, its biggest drop since the day after the U.K. voted to leave the European Union.

The central bank announcements over the past two days offered the latest evidence that heady growth expectations for Europe and other major economies outside the U.S. might not be achieved, defying analysts who began the year convinced that the world economy’s first synchronized expansion in years would continue.

The International Monetary Fund said in January that the world’s seven largest economies each grew more than 1.5% in 2017, and it predicted more solid growth this year. Global manufacturing was booming and the IHS Markit global purchasing managers index that month was its strongest in nearly seven years.

Many investors counted on a revitalized Europe to lead that growth in 2018. But recent labor strikes in France, political turmoil in Italy and softer economic data are causing investors to rethink that premise. Germany last week reported that factory orders dropped 2.5% in April, while eurozone growth was 0.4% in the first quarter, down from 0.7% in the final quarter of 2017. On Thursday, the ECB revised down its eurozone growth expectations for this year to 2.1%, from 2.4%.

“When we look at Europe, the very strong momentum we saw in data last year has been waning this year,” said Holly MacDonald, chief investment strategist at Bessemer Trust.

Europe isn’t the only region to show signs of cooling down. The People’s Bank of China this week also left a suite of key short-term interest rates unchanged. New data showed business activity, including investment and retail sales, slowed in May, suggesting the world’s second-largest economy is facing growing headwinds.

The disappointing figures “warranted China to take a cautious tone,” said Tommy Xie, an economist at OCBC Bank.

In the U.S., meanwhile, recent data suggest an economic expansion that just became the second-longest in the nation’s history is accelerating, rather than slowing down.

The U.S. economy grew modestly over the winter—at a 2.2% annual rate in January through March—but seems to be ramping up further this spring. Growth is on track to exceed a 4% pace in the three months ending in June, which would be the fastest of any quarter in almost four years.

Spending at U.S. retailers soared 0.8% in May, the biggest jump in six months, according to U.S. government data released on Thursday. Consumers, spurred by tax cuts and the lowest unemployment in half a century, shelled out more for cars, clothing, building supplies, health products and bar tabs.

“We may be entering a new level of consumer spending right now,” said economist Robert Frick of the Navy Federal Credit Union. He pointed out that more and more blue-collar workers are finding work as the labor expansion endures, and those workers tend to spend a greater portion of their incomes, out of necessity, than higher-income workers, who save more.

He added that low unemployment, strong consumer spending and modest inflation are likely to keep the economy on strong footing this year: “We’re in a Goldilocks zone right now.”

In the eurozone, rates have stayed pegged at negative levels—now at minus 0.4%—since 2014. Despite some initial concerns, investors have become more relaxed about possible unintended effects of negative rates on the economy.

On Thursday, investors reacted to the ECB’s announcement to end bond purchases while keeping rates low longer by selling the euro and bidding up stocks. It is the latest example of interest-rate moves returning to the driver’s seat of monetary policy. In the wake of the financial crisis, central bankers rolled out a raft of unprecedented and complex measures, including bond buying and lending facilities for banks, pitching them as a way to lower long-term borrowing costs at a time when short-term rates could go no lower.

Not all investors are ready to write off Europe’s growth prospects. Roland Kaloyan, head of European equity strategy at ?Société Générale, believes that lackluster economic data in the first quarter is a “temporary soft patch,” and that “fundamentals remain very solid for eurozone growth,” whereas he expects the U.S. economy to go into a recession around 2020.

Others believe the euro will continue to weaken further this year, but think that markets are swinging too far in favor of U.S. growth.

Next year, “we expect the euro to rebound against the dollar even if the ECB only hikes late in the year,” said Ingvild Borgen Gjerde, an analyst at Capital Economics. “We think the Fed’s tightening cycle will come to an end in mid-2019, far sooner than is discounted in the markets.”

*question*

4. Should a goal of monetary policymakers be to raise the value of its currency? How would a currency appreciate both help and hurt an economy? If a central bank wants to appreciate its currency, how in practice would it do so?