Financial Condition Analysis
a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve
(i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
For each ratio calculated in parts a and b, in question 17.1, Be sure to provide an assessment of how Green Valley is doing in comparison to industry averages.
Consider the following financial statements for Green Valley Nursing Home, Inc. a for profit long-term care facility:
Green Valley Nursing Home Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2011
Net patient service revenue $3,163,258
Other revenue 106,146
Total Revenue $3,269,404
Salaries and benefits $1,515,438
Medical supplies and drugs 966,781
Insurance and other 296,357
Provision for bad debts 110,000
Total expenses $3,180,356
Operating Income $89,048
Provision for income tax 31,167
Net Income $57,881
Retained earnings, beginning of year $199,961
Retained earnings, end of year $257,842
Green Valley Nursing Home Inc.
December 31, 2011
Marketable securities 200,000
Net patient accounts receivables 215,600
Total current assets $608,992
Property and equipment $2,250,000
Less accumulated depreciation 356,000
Net property and equipment $1,894,000
Total assets $2,502,992
Liabilities and Shareholder's Equity
Accounts payable $72,250
Accrued expenses 192,900
Notes payable 100,000
Current portion of long-term debt 80,000
Total current liabilities $445,150
Long term debt $1,700,000
Common stock, $10 par value $100,000
Retained earnings 257,842
Total shareholder's equity $357,842
Total liabilities and shareholders' equity $2,502,992
A. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
Total margin 3.5%
Total asset turnover 1.5
Equity multiplier 2.5
Return on equity 13.1%
B. Calculate and interpret the following ratios: Industry Average
Return on assets (ROA) 5.2%
Current ratio 2.0
Days cash on hand 22
Average collection period 19 days
Debt ratio 71%
Debt to equity ratio 2.5
Times interest earned (TIE) ratio 2.6
Fixed asset turnover ratio 1.4
c. Assume that there are 10,000 shares of Green Valley's stock outstanding and that some recently sold for $45 per share.
- What is the firm's price/earnings ratio?
- What is its market/book ratio?
d. Refer back to Textbook Problem 17.5. Recast the financial statements for Green Valley into common size financial statements. Describe at least two advantages of a common size presentation of financial statements.
This solution contains step-by-step calculations to determine the changes in current assets and current liabilities to increase current ratio, it also recast financial statements as common size and computes financial ratios and DuPont.