Question

Pecunious Products, Inc.’s financial results for the past three years are summarized below:

	Year 3			Year 2			Year 1
Sales trend		128.0			115.0			100.0
Current ratio		2.5			2.3			2.2
Acid-test ratio		0.8			0.9			1.1
Accounts receivable turnover		9.4			10.6			12.5
Inventory turnover		6.5			7.2			8.0
Dividend yield		7.1	%		6.5	%		5.8	%
Dividend payout ratio		40	%		50	%		60	%
Dividends paid per share*	$	1.50		$	1.50		$	1.50

*There have been no changes in common stock outstanding over the three-year period.

Required:

Your boss has asked you to review these results and then answer the following questions:

a. Is it becoming easier for the company to pay its bills as they come due?
b. Are customers paying their accounts at least as fast now as they were in Year 1?
c. Is the total of the accounts receivable increasing, decreasing, or remaining constant?
d. Is the level of inventory increasing, decreasing, or remaining constant?
e. Is the market price of the company’s stock going up or down?
f. Is the earnings per share increasing or decreasing?
g. Is the price-earning ratio going up or down?

Answer 1

A) No, as the company liquid assets are decreasing, this can be seen by an falling trend in Acid test ratio.

b) Yes, the accounts receivable ratio is falling which indicates receivables against the turnover

c) Accounts receivables are increasing, this require the calculation of account receivables using the turnover and the accounts receivable turonver ratio.

d) Inventory are increasing, which can be identified by calculating inventory figures through the turnover and inventory turnover ratio

e) Market Price is going down, since the dividend yield is increasing at constant DPS.

f) EPS of the company is increasing.

g) PE Ratio is going down, since MPS is falling.