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# Financial analysis by ratios,horizantal & vertical analysis

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Find a manufacturing company's annual report.

Calculate the following ratios for the company ( company selected below) selected:

Return on Assets
Return on Equity
Gross Profit Margin
Debt/Equity Ratio
Debt Ratio
Current Ratio
Quick Ratio
Inventory Turnover
Total Asset Turnover
Price Earnings Ratio
Using the calculated ratios, analyze the financial performance of the firm. In a memo to the CEO, explain the ratios calculated. Also address other methods of analyzing financial statements besides ratio analysis. Lastly, explain your analysis of the firm, making recommendations for improvements.

For this task please use the following company:

Tootsie Roll Corporation (2006) http://www.tootsie.com

Calculate the following ratios for 2006: (NOTE 2006)

Return on Assets
Return on Equity
Gross Profit Margin
Debt Ratio
Current Ratio
Debt/Equity Ratio
Inventory Turnover
Quick Ratio
Price Earnings Ratio
Total Asset Turnover

Using the calculated ratios, analyze the financial performance of the firm

In a memo to the CEO, explain the ratios calculated

Also address other methods of analyzing financial statements besides ratio analysis

Lastly, include within your analysis of the firm, recommendations for improvements

2000 words - original work - apa format references - original work

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#### Solution Preview

Dear student,
Analyse the financial performance of the company

I) By Ratio Analysis

Return on assets:

Return on assets =Net income/total assets
Return on assets indicates how much the management is efficient in generating the earnings from the assets available. Higher return on assets indicates that the management is efficient and lower Return on assets indicates that the inefficiency of the management. Return on assets should be compared with the Return on assets of the previous years and the industry average. To achieve higher ROA, the management has to make wise choices in allocating its resources.
In case of tootsie:
Return on Assets Net income /total assets 2006 2005 2006 2005
Net income 65919 77227 8.33 9.49
Total assets 791639 813696

Return on assets for the year 2005 is 9.49 and it is decreased slightly and the return on equity was 8.33. The reason behind this is decrease in the net income as the net income was 77227 (in' 000) and it was decreased to 65919('000) even though there is decline in the total assets.

Return on equity:
Return on equity =Net income/shareholders' equity
Here net income means earnings after preference dividend. Shareholders' equity does not include preference shares. Shareholders' equity= Total assets -total liabilities
Shareholders' equity can also be calculated by
Paid -up share capital + Reserves and Surplus + Net income earned during the year.

Return on equity indicates how much the management is efficient in generating profit from the every dollar of shareholders' equity.
Return on equity of the company should be compared with the Return on equity of other companies in the same industry and the return on equity of the company of the previous financial years. If the Return on equity is showing the increasing rate, the shareholders would be happy and they would not sell the shares and they will be induced to invest more shares in the company. Likewise, if the Return on equity of the company is lesser than the industry average, then the shareholders would be tempted to sell their shares and invest in other companies which yiled high return for their money. On the other hand, if the Return on equity is high in the industry, then the shareholders would retain their money as capital in the company and they would invest more by purchasing additional shares if the company comes out for public offer.
In case of tootsie:

Return on equity Net income/total shareholders' equity 2006 2005 2006 2005
Net income 65919 77227 10.45 12.51
shareholders' equity 630681 617405
Return on equity for the year 2005 is 12.51% and it was decreased and it stood at 10.45%. The reduction in the return on equity is due to the decline in the net income of the company. The net income of the company was 77227 (000) and the net income was reduced to 65919(000). The decline in net income has resulted in the reduction in the return on equity. Further, there is increase in denominator (shareholders' equity) which further reduced the shareholders' equity. The shareholders' equity \$ 617405 (in '000) in the year 2005 and it was ...

#### Solution Summary

The solution contains the financial analysis of Tootsie Roll Corporation by ratios and horizantal and vertical analysis.

\$2.19

## Horizantal & vertical analysis and Ratios

1. Prepare horizontal and vertical analyses.
The comparative balance sheets of Philip Morris Companies, Inc. are presented here.

PHILIP MORRIS COMPANIES, INC.
Comparative Balance Sheets
December 31
(\$ in millions)
Assets 2004 2003
Current assets \$25,901 \$21,382
Property, plant, and equipment (net) 16,305 16,067
Other assets 59,442 58,726
Total assets \$101,648 \$96,175

Liabilities and Stockholders' Equity
Current liabilities \$23,574 \$21,393
Long-term liabilities 47,360 49,705
Stockholders' equity 30,714 25,077
Total liabilities and stockholders equity \$101,648 \$96,175

Instructions:
Prepare horizontal analysis of the balance sheet data for Philip Morris using 2003 as a base. (Show the amount on increase or decrease as well.) Prepare a vertical analysis of the balance sheet data for Philip Morris for 2004.

2. Prepare horizontal and vertical analyses.
Here are the comparative income statements of Erik Corporation.

ERIK CORPORATION
Comparative Income Statement
For the Years Ended December 31

2007 2006
Net sales \$572,000 \$520,000
Cost of goods sold 477,000 450,000
Gross profit \$95,000 \$70,000
Operating expenses 60,000 45,000
Net income \$35,000 \$25,000

Instructions:
Prepare a horizontal analysis of the income statement data for Erik Corporation using 2006 as a base. (Sow the amounts of increase or decrease). Prepare a vertical analysis of the income statement for Erik Corporation for both years.

3. Compute liquidity ratios.
Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data (in millions) for 2005 are presented on page 668.

End of Year Beginning of Year
Cash and cash equivalents \$360.3 \$340.3
Receivables (net) 645.7 666.8
Merchandise inventory 917.2 901.6
Other current assets 649.2 616.1
Total current assets \$2,572.4 \$2,524.8

Total current liabilities \$1,341.2 \$1,122.6

For the year, net credit sales were \$7,131.4 million, cost of goods sold was \$4,559.4 million, and cash from operations was \$660.3 million.

Instructions:
Compute the current ratio, current cash debt coverage ratio, receivables turnover ratio, average collection period, inventory turnover ratio, and days in inventory at the end of the current year.

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