You have been hired by First Citizens Bank as a financial analyst. One of your first job assignments is to analyze the present financial condition of Bradley Stores, Incorporated. You are provided with the following 2009 balance sheet and income statement information for Bradley Stores. In addition, you are told that Bradley Stores has 10,000,000 shares of common stock outstanding, currently trading at $9 per share, and has made annual purchases of $210,000,000.
Your assignment calls for you to calculate certain financial ratios and to compare these calculated ratios with the industry average ratios that are provided. You are also told to base your analysis on five categories of ratios: (a) liquidity ratios, (b) activity ratios, (c) debt ratios, (d) profitability ratios, and (e) market ratios.
|
Balance Sheet (in 000s) |
||||
|
Cash |
$5,000 |
|
Accounts payable |
$15,000 |
|
Accounts receivable |
20,000 |
|
Notes payable |
20,000 |
|
Inventory |
40,000 |
|
Total current liabilities |
$ 35,000 |
|
Total current assets |
65,000 |
|
Long-term debt |
100,000 |
|
Net fixed assets |
135,000 |
|
Stockholders’ equi ty |
65,000 |
|
Total assets |
$200,000 |
|
Total liabilities and equity |
$200,000 |
|
Income Statement (in 000s) |
|
|
Net sales (all credit) |
$300,000 |
|
Less cost of goods sold |
250,000 |
|
Earnings before interest and taxes |
$50,000 |
|
Less interest |
40,000 |
|
Earnings before taxes |
$ 10,000 |
|
Less taxes (40%) |
4,000 |
|
Net income |
$6,000 |
Industry Averages for Key Ratios:
|
Net profit margin |
6.4% |
|
Average collection period (365 days) |
30 days |
|
Debt ratio |
50% |
|
P/E ratio |
23 |
|
Inventory turnover ratio |
12.0 |
|
ROE |
18% |
|
Average payment period (365 days) |
20 days |
|
Times interest earned ratio |
8.5 |
|
Total asset turnover |
1.4 |
|
Current ratio |
1.5 |
|
Assets-to-equity ratio |
2.0 |
|
ROA |
9% |
|
Quick ratio |
1.25 |
|
Fixed asset turnover ratio |
1.8 |
Directions
Use the following guidelines to complete this job assignment.
First, identify which ratios you need to use to evaluate Bradley Stores in terms of its (a) liquidity position, (b) business activity, (c) debt position, (d) profitability, and (e) market comparability.
Next, calculate these ratios.
Finally, compare these ratios to the industry average ratios provided in the problem and answer the following questions.
Based on the provided industry average information, discuss Bradley Stores, Inc.’s liquidity position. Discuss specific areas i n which Bradley compares positively and negatively with the overall industry.
Based on the provided industry average information, what do Bradley Stores, Inc.’s activity ratios tell you? Discuss specific areas i n which Bradley compares positively and negatively with the overall industry.
Based on the provided industry average information, discuss Bradley Stores, Inc.’s debt position. Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
Based on the provided industry average information, discuss Bradley Stores, Inc.’s profitability position. As part of this investigation of firm profitability, include a DuPont analysis. Discuss specific areas in which Bradley compares positively and negatively with the overall industry .
Based on the provided industry average information, how is Bradley Stores, Inc. viewed in the marketplace? Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
Overall, what are Bradley’s strong and weak points? Knowing that your boss will approve new loans only to companies i n a better-than-average financial position, what is your final recommendation (approval or denial of loan)?
