3-24 Integrative—Complete ratio analysis Given the following financial statements (fol- lowing and on page 109), historical ratios, and industry averages, calculate Sterling Company's financial ratios for the most recent year. (Assume a 365-day year) Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense Goneral and administrative expenses Lease expense Depreciation expense “Total operating expense Operating profits Less: Interest expense [Net profits before taxes Less: Taxes (rate = 40%) [Net profits after taxes Less: Preferred stock dividends Farnings available for common stockholders ‘Earnings per share (EPS) $10,000,000 7,500,000 $ 2,500,000 $300,000 650,000 50,000 200,000 $1,200,000 $ 1,300,000 200,000 $ 1,100,000 440,000 $660,000 50,000 $610,000 $3.05 J Libiltes and Stool" Equity Cok $200,000 ‘Accounts payable? $900,000 Marketable secures ‘Notes payable 200,000 ‘Accounts resivable Accruals 100,000, Inventories “oral current ibis 5 1200,000 ‘oral unre assets Long-term deb ices (Gross fixed asc (at cost" financial eee $3,000,000, es: Accumulated depresaton Preferred sk (25,000 shares, Rae $2 dividend) 5 1,000,000 Other assets ‘Gommon stock (200,000 “oral assets shares at 33 pa? 600,000 ‘Paid capital in excess of| par vale 5,200,000, Retained earings — 1.000.000, ‘Tonal stockholders’ equity 5 7300,000, ‘Total ities and stockholders equity ‘Then tas an eran ase euring anol begining oye payments of $50,000 He yes oe leas ave YtTo we "gal rat perches of 5,200 00 were made daring the yea The annlpeinpal payment onthe lange dee $10,000. 0 Deer 31 201th Gm common vk low at $3950 pe she,Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt profitability, and market. Industry average, Ratio Actual 2010 Actual 2011 2012 Current ratio 1.40 1.55 1.85 Quick ratio 1.00 092 1.05 Inventory turnover 9.52 921 8.60 Average collection period 45.6 days 36.9 days 35.5 days Average payment period 59.3 days 61.6 days 46.4 days ‘Total asset turnover 0.74 0.80 0.74 Debe ratio 0.20 0.20 0.30 ‘Times interest earned ratio 8.2 73 8.0 Fixed-payment coverage ratio 45 42 42 Gross profit margin 0.30 0.27 0.25 Operating profit margin 0.12 012 0.10 Net profit margin 0.062 0.062 0.053 Return on total assets (ROA) 0.045 0.050 0.040 Return on common equity (ROE) 0.061 0.067 0.066 Earnings per share (EPS) $17 $2.20 $1.50 Priceicarnings (P/E) ratio 12.0 10.5 11.2, Market/book (M/B) ratio 1.20 1.05 1.10