Question

The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of personal computers, the firm has recently undergone a period of explosive growth, more than doubling its revenues over the last two years. However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the company's stock price.

You are a financial consultant who has been retained to analyze the company's performance and find out what's going wrong. Your investigative plan involves conducting a series of in-depth interviews with management and doing some independent research on the industry. However, before starting, you want to focus your thinking to make sure you can ask the right questions. You'll begin by analyzing the firm's financial statements over the last three years.

This is part of problem #26 in your text

PROTEK COMPANY

INCOME STATEMENTS

For The Periods ended 12/31

(000,000)

	20X1	20X2	20X3
Sales	$1,578	$2,106	$3,265
COGS	631	906	1,502
Gross Margin	$   947	$1,200	$1,763
Expenses
Marketing	$316	$495	$882
R & D	158	211	327
Admin.	126	179	294
Total Expenses	$   600	$   885	$1,503
EBIT	$347	$315	$260
Interest	63	95	143
EBT	$284	$220	$117
Tax	97	75	40
EAT	$187	$145	$ 77

BALANCE SHEETS

12/31

($000,000)

	20X1	20X2	20X3
ASSETS
Cash	$     30	$     40	$     62
Accounts Receivable	175	351	590
Inventory	90	151	300
Current Assets	$    295	$    542	$    952
Fixed Assets
Gross	$1,565	$2,373	$2,718
Accum. Depreciation	(610)	(860)	(1,135)
Net	$   955	$1,513	$1,583
Total Assets	$1,250	$2,055	$2,535
LIABILITIES
Accounts Payable	$56	$81	$134
Accruals	15	20	30
Current Liabilities	$71	$101	$164
Capital
Long-Term Debt	$630	$1,260	$1,600
Equity	549	694	771
Total Liability & Equity	$1,250	$2,055	$2,535

You are responsible for the following:

1) Complete the ratios indicated for three years

2) Compare the ratios to the industry in a write up. Indicate if the specific ratio is better or worse than the industry and why

Ratios to calculate:

1) Current Ratio

2) Average Collection Period

3) Debt Ratio

4) Times Interest Earned Ratio

5) Return on Equity

The Industry averages are as follows:

            Industry

                                    Average           20X1               20X2               20X3

Current Ratio                 4.5

ACP                             42 days

Debt Ratio                   53%

TIE                              4.5

ROE                             22.8%

Answer 1

As per rules I am answering the first 4 subparts of the question

1: Current ratio = Current assets/ current liabilities

20X1

Current ratio = 295/71= 4.15

20X2

Current ratio =542/101 = 5.37

20X3

Current ratio =952/164=5.80

2: Average Collection Period

20X1

ACP = 365*Receivables/ Net sales

= 365*175/1578 = 40.48

20X2

ACP = 365*351 /2106 =60.83

20X3

ACP = 365*590/3265=65.96

3: Debt ratio = Total liabilities/ Total assets

20X1

Debt ratio = (71+630)/1250=0.56

20X2

Debt ratio= (101+1260)/2055=0.66

20X3

Debt ratio = (164+1600)/2535=0.70

4: TIE = EBIT/Interest

20X1

TIE= 347/63=5.51

20X2

TIE = 315/95=3.32

20X3

TIE = 260/143=1.82