University of Texas at Austin Answer Sheet for AFFFH R.

Hughes Instructor Name_______Jiani Che__________________________ Cohort___11:00am___ Grade_____ Use the case Assessing a Firms Future Financial Health, pages 9-16, only turn in your answers Part 1- Ratios - Profitability Ratios: Information is on the ____INCOME STATEMENT____ 1. __ 1,307 ____,____ 48,769 _____,_____ 2.68% ______ 2.____ decrease ____, ___ 3.60% _____ 3.___ increase ____, ____ increase ___, ____ income tax paid ____ 4. ___ 15,249 ___,___ 1,824 _______, ____ 11.96% ______, ____ decrease ______, _____ 14.67% ___ 5. ____ 12,193 ______, ____ 1,307 _____, ____ 10.72% _____, ___ deterioration ____, ____ 15.22% __ Activity Ratios: 1. ___ 48,769 ___,___ 22,780 __, __ deteriorated __, ______ 2.17 _______, _____ 2.14 ___ 2. ____ 7,380 _____,___ 133.614 _____, ____ 55.23 _____, ___ improvement ___, ___ 58.68 ___ 3. ____ 8,220 ___,_____ 29,700 ___, ____ 3.61 ____, ____ deterioration ___, ___ 4.76 ____ 4. ____ 5,160 _____,____ 48,769 ___, ____ 9.45 ____, ___ improvement ___, ____ 7.98 ____ 5. a)return on invested capital, b) net profit margin, c) return on equity, d) fixed asset turnover ratio e) average collection period , f) inventory turnover ratio, g) total asset turnover 6. The total asset turnover for Magnentronics decreased in 1999 meaning that asserts are not used efficiently at full capacity. Inventory turnover ratio deteriorated in 1999 representing poor effectiveness of using inventory. There is also an increase of operating expenses compared to percentage of sales. All these factors decrease operating profit. Leverage Ratios: 1. __ 10,587____, ____ 46.47%__, ___ decrease___, ____ 48.55%____ 2. ___ 42.58%_____ 3. ___ 2,528___,_____ 517_____, ____ 4.89___, ____ deterioration___, ____ 7.12____ 4. ___ 2,820____,____ 9.49%____, ____ increase___, ____ 8.42%____, ___ less____ 5. Increased operating costs in comparison to revenues and a slow net income increase compared to equity 6. __increased__ Liquidity Ratios: 1. ___ 17,620__,____ 7,531____, ___ 2.34______, ___ deterioration____, ___ 2.41____ 2. ____ 1.25____, ___ deterioration__, ____ 1.52__

Part 2 Given what you have observed about Magnatronics Now we analyze Magnatronics ratios by calculating the relative change over time for these ratios. 1. Profitablity Ratios: Magnatronics is not as profitable as it was in the previous time period. How much did it deteriorate? Measure the change by subtracting the new 1999 profit as a percentage of change from the 1995 profit as a percentage of change and then divide that number by the original 1995 number. Typically we call this New Minus Old, Divided by Old or First Difference. This tells us how much deterioration as a percentage, not just a nominal change. It can be a powerful tool. On a percentage basis, how much did Magnatronics Profit decline?____-25.55%_________ On a percentage basis, how much did its ROIC change?____-22.66%___________ What about ROE?______-29.57%__________________ Summarize Magnatronics changing profitability picture in one paragraph. Magnatronics has deteriorating profitability ratios from 1995 to 1999. Magnatronics profit declined by 25.55% in 1999. The reason for the decline in profitability is because of the increase in the cost of goods sold and operating expenses as a percentage of sales. The return on capital also decreased by 22.66% meaning that based on the shareholder investments, the company is not earning as much as they did in 1995. Another profitability measure is the return on equity, which has also decreased 29.57% in four years. All three of the deteriorating profitability ratios show that Magnatronics have not been doing well in the last few years with low profit margins.

2. Activity Ratios: looking at the relative differences of these numbers help to complete the story at Magnatronics. Total Asset Turnover- what percentage did it change?____-1.38%_____ What slows down Asset Turnover? _collection of account receivables _ What could be done about it? Change collection policies or choose creditworthy customers Average Collection Period- the number of days doesnt tell us much, what percentage change occurred? _-5.88%__ Did the company do something to make this change? No Could you think of ideas to encourage this trend in collections? Discuss options. Give a discount to the companies if they pay in advance to encourage more people to pay early. Another option is to set credit limits on certain companies that have poor credit. Monitoring which companies pay on time and which dont. Developing actions for overdue actions.

Concerning COGS, inventory turnover is a most important number to watch. What percentage change is happening at Magnatronics?_-24.16% Are Fixed Assets turning over more or less slowly? State is as a percentage. less slowly 18.42% 3. Leverage Ratios: is the company using debt as effectively or not as it did in the past? What is the change in the Total Debt Ratio?_-4.28% ____ What is the change in the Total Debt Ratio at Market? 42.58% What about Times Interest Earned? -31.32% What is happening with Magnatronics prompt payments?_Magnatronics is paying less promptly What is the risk in slowing down the companys bill payment cycle? Risk of reduced cash flows and shortage of cash 4. Liquidity is always an issue in that companys must have cash readily available to meet demands. Cash management and cash flow are both important. How much has the Current Ratio changed?_-2.90% Has Magnatronics maintained its Quick Ratio or is there a significant percent change? There is a significant decrease of -17.76%.

5. I would not hire the company. The company shows poor ratios in profitability, activity, leverage, and liquidity. The company shows poor profitability ratios that have decreased from 1995. The profit as a percentage of sales declined along with the return on equity. Activity ratios are also very bad even though collection periods increased. There is a less efficient use of inventory and total assets based on the asset and inventory turnover ratios. The financial riskiness of the company increased throughout the years. The interest earned ratio is deteriorating, which relates debt to the economic value. Equity is growing more than net income. In terms of liquidity, both the quick and current ratios deteriorated, meaning that the company is short on cash. Based on all four factors, the company is not doing well. Would you hire you? Limit your answer to one paragraph, try to think of yourself as a one person company- are you profitable, do you employ your assets, are you soundly financed and do you have enough cash and support to last the year? Enjoy writing your answer. This assignment is due next time we meet at the beginning of class. If you are online, please submit your answers through Blackboard. Thanks, Regina Hughes