FPX5010 Ford Candace Assessment 3-1 PDF

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1 Performance Evaluation

Performance Evaluation Candace N Ford Capella University

2 Performance Evaluation Executive Summary The purpose of this document is to give my recommendation of Ace Company’s request for a $3-million, 10-year loan to purchase production equipment and develop accompanying software. The company has provided its financial statements for fiscal years ending 2016 & 2017 (See Appendix 1). I have also included various financial ratios (Appendix 2) that will be discussed in detail within this executive summary.

Ace Company’s Key Performance and Trends

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Accounts Receivable Trends – Ace Company makes all customer sales on credit. The accounts receivable turnover ratio measures the number of times over a given period that a company collects its average accounts receivable. In 2017 and 2016 the Ace Company’s Accounts Receivable turnover was 5.06 times and 4.68 times respectively. This 8% increase indicates that Ace has become more efficient in the overall collection of revenue and implemented efficiencies in using its assets. It also have favorable growth in sales of 11%.

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Inventory Turnover – This ratio represents the speed at which a company can sell inventory. This is a critical measure of business performance. The average industry rate for Ace Company is 10 times per year. Ace Company’s 2017 and 2016 were 1.82 and 1.94 respectively. Compared to the industry, Ace Company’s rate of inventory turnover is slower than the industry average. If all other aspects are similar to their competitors, then they are making more profit than Ace for each dollar they have invested in their inventory. In addition, with the 6% decline, Ace’s inventory trend is not improving.

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Credit Worthiness – in evaluating the company's short-term and long-term creditworthiness, we calculated and analyzed their current ratio and debt to equity ratio. o Current Ratio - The current ratio is the difference between current assets and current liabilities. It measures a business’s ability to meet its short-term

3 Performance Evaluation liabilities when they come due. Ace Company’s 2017 current ratio of 1.79 indicates a stronger ability to meet its short-term obligations compared to a 1.53 ratio in 2016.

o Debt to Equity Ratio – In 2017 and 2016, Ace Company’s debt to equity ratio was 2.49 times and 3.78 times respectively. This ratio measures how much debt a company is carrying as compared to the amount invested by its owners. It indicates the liabilities of the business for every dollar of shareholders' equity. Equity is defined as the assets available for collateral after the priority lenders have been repaid. The company’s ability to decrease this ratio by 34% is a positive indicator of their ability to repay their debts. Recommendation Based on the financial data provided, it is my recommendation that the bank grants the $3m loan to Ace Company. Their ability to efficiently collect receivables, the increase in sales and their strong debt to equity ratio are favorable indicators of the ability to repay this loan. Using the loan to invest in production equipment and accompanying software will give them the tools they need to improve their inventory turnover rate.

4 Performance Evaluation Appendix 1

Ace Company Balance Sheet (All dollar amounts in tables are in thousands of dollars.) Assets

2017 Cash Accounts receivable Inventories (FIFO) Property, plant and equipment, net of accumulated depreciation Other long-term assets TOTAL ASSETS

Liabilities and Equity

2016

$2,547 4,000 6,000 10,000

$1,800 3,900 5,000 9,800

1,000 $23,547

1,000 $21,500

2017

Current liabilities Long-term liabilities Common stock, no par, 500,000 shares issued and outstanding Retained earnings TOTAL LIABILITIES AND EQUITY

2016

$7,000

$7,000

9,800 2,000

10,000 2,000

4,747 $23,547

2,500 $21,500

Ace Company Income Statement (All dollar amounts in tables are in thousands of dollars.) 2017 Net sales Cost of goods sold Gross profit Operating expense = Operating income Interest expense Income before income tax Income taxes

Net income

2016

$20,000 10,000

$18,000 9,500

10,000 4,000 6,000 588 5,412 2,165

9,500 3,700 4,800 600 4,200 1,680

$3,247

$2,520

5 Performance Evaluation Appendix 2

Ace Company Financial Ratios 2017 Current ratio 12,547/7,000 = 1.79 Total debt to equity 16,800/6,747 = 2.49 times Gross profit rate (gross margin %) 10,000/20,000 = 50%

2016 10,700/7,000 = 1.53 17,000/4,500 = 3.78 times 8,500/18,000 = 47.2%

Net Profit Rate (Net margin %) EPS (Earnings per share) PE ratio (Price/Earnings) Dividend yield % Dividend payout Times interest earned

3,247/20,000 = 16.2% 3,247,000/500,000 = $6.49 104/$6.49 = 16.02 2/$104 = 1.9% $1,000,000/3,247,000 = 30.8% $6,000/$588 = 10.2 times

2,520/18,000 = 14% 2,520,000/500,000 = $5.04 $81/$5.04 = 16.07 $2/$81 = 2.5% $1,000,000/$2,520,000 = 39.7% $4,800/$600 = 8 times

Inventory turnover

10,000/((6,000 + 5,000)/2) = 1.82 times

$9,500/(($5,000 + $4,800)/2) = 1.94 times

Accounts receivable turnover

20,000/((4000 + 3,900)/2) = 5.06 times

$18,000/(($3,900 + $3,800)/2) = 4.68 times

Ace Company Data The company’s financial data is condensed from the financial statements of Ace Company. Both the Income Statement and Balance Sheet tables are for 2016 and 2017, ending December 31. 

Inventory at December 31, 2015 was $4,800,000. Accounts receivable at December 31, 2015 was $3,800,000.

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The market price of the common stock was $104 per share at December 31, 2017, and $81 per share at December 31, 2016.

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There were no changes in the number of shares of common stock during 2017, 2016, or 2015.

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There are no shares of preferred stock. There are no stock options, convertible debt, or other possible sources of common stock.

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Cash dividends of $1,000,000 ($2.00 per share) were paid in both 2017 and in 2016.

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All sales are made on credit.

Note: All dollar amounts in tables are in thousands of dollars.

6 Performance Evaluation References

Business Development Bank of Canada. Current ratio calculator (Working capital ratio). Retrieved from https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/ratiocalculators/pages/current-ratio.aspx

Business Development Bank of Canada. Debt to Equity Ratio. Retrieved from https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/ratio-calculators/pages/debt-toequity-ratio.aspx

Corporate Finance Institute. Accounts Receivable Turnover Ratio. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/accountsreceivable-turnover-ratio/

Hargrave, M. (2019, June 26). Inventory Turnover. Investopedia. Retrieved from https://www.investopedia.com/terms/i/inventoryturnover.asp...