Hemingway Corporation manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States. The company is considering expanding its operations worldwide to boost its income and cash flows. The expansion project will require the company to raise $100 million capital to finance the project. Mike Schenk, MBA has been hired to assist the company with the preparation of financial statement analysis and to suggest actions needed to raise the needed funds. Schenk is directed to send copies of the financial statement analysis to management of the company, potential lenders, and strategic investors. The balance sheet and income statement for the company are shown below.
Balance Sheet (Millions of Dollars)
|Cash and equivalents||62||52||52|
|Total current assets||1,206||1,426||1,316|
|Net fixed assets||2,920||3,520||3,720|
|Liabilities and equity|
|Total current liabilities||712||922||757|
|Common stock (100,000 shares)||1,000||1,000||1,000|
|Total common equity||2,650||2,924||3,216|
|Total liabilities and equity||4,126||4,946||5,036|
Income Statement (millions of Dollars)
|Cost of goods sold||4,400||4,800||5,320|
|Other operating expenses||360||400||410|
|Earnings before interest and taxes (EBIT)||1,448||1,478||1,498|
Industry average for selected ratios
|Profit margin||16.0%||Inventory turnover||6.0|
|Operating profit margin||22.0%||Fixed assets turnover||2.3|
|Basic Earning power||35.5%||Total assets turnover||1.6|
|P/E ratio||9.4||Debt ratio||30.0%|
- The financial ratio analysis of the company is being conducted for management, equity investors, and long-term potential creditors. Explain the primary emphasis of each of these groups in evaluating the ratios.
- Calculate the following profitability ratios for Hemingway Corporation for 2020:
- Operating profit margin
- Return on assets (ROA)
iii. Return on equity (ROE)
- Basic Earning Power (BEP)
- Calculate the following asset management ratios for Hemingway Corporation for 2020:
- total assets turnover
- Fixed assets turnover
iii. Inventory turnover
- Calculate the following liquidity and debt management ratios for Hemingway Corporation in 2020:
- Current ratio
- Quick ratio
iii. Debt ratio
- Explain trend analysis. Calculate the projected profitability ratiosfor Hemingway Corporation for 2021.
- Using the trend analysis indicate whether the financial performance of Hemingway Corporation has improved or worsened over the years.
- Explain benchmarking. Indicate whether the asset management ratios of the company have improved or worsened relative to the industry.
- Mike Schenk is using the extended Dupont equation to predict the Return on Equity (ROE) for Hemingway Corporation for 2022. He forecasts the following ratios for 2022.
|Total assets turnover||1.6|
Calculate the Return on Equity (ROE) for Hemingway Corporation for 2022.
- Mike Schenk explains to the CEO that although the financial ratio provides useful information concerning the company’s operation, it has limitations that necessitate care and judgment. Identify four limitations of ratio analysis that Mike is addressing.
- In the report sent to investors and credit lenders, Mike indicated that financial statement analysis goes beyond comparing ratios, and that qualitative factors must be considered as well. Identify five such qualitative factors that the users of the financial statement should consider when evaluating the company’s future financial performance.