Simon Company’s year-end balance sheets follow.

 Simon Company’s year-end balance sheets follow.

 

Additional information about the company follows.
 

Common stock market price, December 31, Current Year    $ 30.00
Common stock market price, December 31, 1 Year Ago    28.00
Annual cash dividends per share in Current Year    0.29
Annual cash dividends per share 1 Year Ago    0.24

1. Express the balance sheets in common-size percents.

2. Assuming annual sales have not changed in the last three years, is the change in accounts receivable as a percentage of total assets favorable or unfavorable?
3. Assuming annual sales have not changed in the last three years, is the change in merchandise inventory as a percentage of total assets favorable or unfavorable? 

(1-a) Compute the current ratio for each of the three years.

Current ratio

Current Year: ($31,800 + $89,500 + $112,500 + $10,700) / $129,900 = 1.88 to 1

1 Year Ago: ($35,625 + $62,500 + $82,500 + $9,375) / $75,250 = 2.52 to 1

2 Years Ago: ($37,800 + $50,200 + $54,000 + $5,000) / $51,250 = 2.87 to 1

(1-b) Did the current ratio improve or worsen over the three-year period?

(2-a) Compute the acid-test ratio for each of the three years.

Acid-test ratio

Current Year: ($31,800 + $89,500) / $129,900 = 0.93 to 1

1 Year Ago: ($35,625 + $62,500) / $75,250 = 1.30 to 1

2 Years Ago: ($37,800 + $50,200) / $51,250 = 1.72 to 1

(2-b) Did the acid-test ratio improve or worsen over the three-year period?

 

 The company’s income statements for the current year and one year ago follow. Assume that all sales are on credit:

(1-a) Compute days' sales uncollected.

Days' sales uncollected

Current Year: $89,500 / $673,500 × 365 = 48.5 days

1 Year Ago: $62,500 / $532,000 × 365 = 42.9 days

(1-b) Determine if days' sales uncollected improved or worsened in the current year.

(2-a) Compute accounts receivable turnover.

(2-b) Determine if accounts receivable turnover ratio improved or worsened in the current year.

(3-a) Compute inventory turnover.

(3-b) Determine if inventory turnover ratio improved or worsened in the current year.

(4-a) Compute days' sales in inventory.

(4-b) For each ratio, determine if days' sales in inventory improved or worsened in the current year. 

Explanation
(1-a)
Days' sales uncollected

Current Year: $89,500 / $673,500 × 365 = 48.5 days

1 Year Ago: $62,500 / $532,000 × 365 = 42.9 days

(1-b)
The ratio has worsened. The number of days' sales uncollected increased and this is not a positive trend.

(2-a)
Accounts receivable turnover

Current Year: $673,500 / (($89,500 + $62,500)/2) = 8.9 times

1 Year Ago: $532,000 / (($62,500 + $50,200)/2) = 9.4 times

(2-b)
The ratio has worsened. Accounts receivable turnover declined and this is not a positive trend.

(3-a)
Inventory turnover

Current Year: $411,225 / (($112,500 + $82,500)/2) = 4.2 times

1 Year Ago: $345,500 / (($82,500 + $54,000)/2) = 5.1 times

(3-b)
The ratio has worsened. Inventory turnover declined and this is not a positive trend.

(4-a)
Days’ sales in inventory

Current Year: $112,500 / $411,225 × 365 = 99.9 days

1 Year Ago: $82,500 / $345,500 × 365 = 87.2 days

(4-b)
The ratio has worsened. Days’ sales in inventory increased and this is not a positive trend.

 

(1) Debt and equity ratios.

(2-a) Compute debt-to-equity ratio for the current year and one year ago.

(2-b) Based on debt-to-equity ratio, does the company have more or less debt in the current year versus one year ago?

(3-a) Times interest earned.

(3-b) Based on times interest earned, is the company more or less risky for creditors in the Current Year versus 1 Year Ago? 

Explanation
(1)
Debt and equity ratios.
 

     Current Year    1 Year Ago
Total liabilities and debt ratio                    
$129,900 + $98,500    $ 228,400    43.7%          
$75,250 + $101,500              $ 176,750    39.7%
Total equity and equity ratio                    
$163,500 + $131,100    294,600    56.3%          
$163,500 + $104,750              268,250    60.3%
Total liabilities and equity    $ 523,000    100.0%    $ 445,000    100.0%
(2-a)
Debt-to-equity ratio

Current Year: $228,400 / $294,600 = 0.78 to 1

1 Year Ago: $176,750 / $268,250 = 0.66 to 1

(2-b)
Simon’s capital structure has more debt in the Current Year versus 1 Year Ago. This is shown in the debt-to-equity ratio, which increased from 0.66 to 1 to the level 0.78 to 1.

(3-a)
Times interest earned
 
Current Year: ($31,100 + $9,525 + $12,100) / $12,100 = 4.4 times

1 Year Ago: ($29,375 + $8,845 + $13,300) / $13,300 = 3.9 times

(3-b)
Based on times interest earned, the company is less risky for creditors in the current year versus 1 year ago. The times interest earned ratio improved from 3.9 to 4.4, suggesting Simon has a greater ability to pay interest expense. This is a result of increasing net income and decreasing interest expense.

 

For both the Current Year and 1 Year Ago, compute the following ratios:

(1-a) Profit margin ratio.

(1-b) Did profit margin improve or worsen in the Current Year versus 1 Year Ago?

(2) Total asset turnover.

(3-a) Return on total assets.

(3-b) Based on return on total assets, did Simon's operating efficiency improve or worsen in the Current Year versus 1 Year Ago?

Explanation
(1-a)
Profit margin

Current Year: $31,100 / $673,500 = 4.6%
1 Year Ago: $29,375 / $532,000 = 5.5%

(1-b)
The profit margin worsened from 5.5% to 4.6%. The decline in profit margin indicates that Simon's ability to generate net income from sales has declined.

(2)
Total asset turnover:

Current Year: $673,500 / (($523,000 + $445,000) / 2) = 1.4 times

1 Year Ago: $532,000 / (($445,000 + $377,500) / 2) = 1.3 times


(3-a)
Return on total assets

Current Year: $31,100 / (($523,000 + $445,000) / 2) = 6.4 %

1 Year Ago: $29,375 / (($445,000 + $377,500) / 2) = 7.1 %

(3-b)
Simon's operating efficiency appears to have worsened because the return on total assets decreased from 7.1% to 6.4%.

 

 Additional information about the company follows.
 

Common stock market price, December 31, Current Year    $ 30.00
Common stock market price, December 31, 1 Year Ago    28.00
Annual cash dividends per share in Current Year    0.29
Annual cash dividends per share 1 Year Ago    0.24

 

For both the current year and one year ago, compute the following ratios:
 
1. Return on equity.

2. Dividend yield.

3a. Price-earnings ratio on December 31.

3b. Assuming Simon's competitor has a price-earnings ratio of 10, which company has higher market expectations for future growth? 

 

Explanation
1.
Return on common stockholders' equity

Current Year: $31,100 / (($294,600 + $268,250) / 2) = 11.1%

1 Year Ago: $29,375 / (($268,250 + $242,750) / 2) = 11.5%

2.
Dividend yield
 
Current Year: $0.29 / $30.00 = 1.0%
1 Year Ago: $0.24 / $28.00 = 0.9%

3.
Price-earnings ratio
 
Current Year: $30.00 / $1.90 = 15.8
1 Year Ago: $28.00 / $1.80 = 15.6
 
3a.
Simon has higher market expectations for future growth. This conclusion is evident from Simon’s superior 15.8 price-earnings ratio versus its competitor’s price-earnings ratio of 10.
  

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