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Sarah Valencia, Financial Management

Neil Gumban, Integrated Case Study


Ashley Canchela,
Joylen Orbigoso,
Lindsay Belnas,
Dan Carlo Poblacion
BABA2B


a) #atios are useIul because it is utilized in order to Iacilitate in the
evaluation the Iinancial statements. Moreover, it will help determine the
strengths and weaknesses oI the company`s Iinancial position compared to
other companies. Furthermore, ratios are used in order to know the
possible risks and Iormulate plans that can improve and enhance the
company`s liquidity, proIitability and Iinancial structure. The Iive maior
categories oI ratios are the Liquidity #atios, Asset Management #atios,
Debt Management #atios, ProIitability #atios and Market Value #atios.

b) rrn oo =
Cucnt Asscts
Cucnt LubItcs

1,985,827
1,073,192
= .9
c oo =
0uck Asscts
Cucnt LubItcs

1,076,448
1,073,192
= .9

For the year 2007, Everlite Technology Co. had a strong liquidity
position because its current assets are signiIicantly higher than its current
liabilities. This means that the company is more than capable in paying
their debts. For 2008, Everlite Technology Co. had a decrease in both
current and quick ratios compared to the industry average. Basing Irom its
Quick #atio, its liabilities are greater than its quick assets. This is a sign oI
a possible trouble in the company because its quick assets may be
insuIIicient to pay oII its current liabilities. With this, we could assess that
during 2008, Everlite had a weak liquidity position. For the year 2009,
there is an increase in both ratios compared to 2008. Eventhough both
ratios didn`t exceed the industry average, we could still assess that Everlite
is regaining its liquidity position in the year 2009.

Yes, these types oI analysts have an equal interest in the
company`s liquidity ratio because the liquidity ratios serve as basis to
determine whether or not a company has the capability to convert its assets
to cash in order to pay oII its debts. Moreover, the liquidity ratios shows
whether the company has eIIiciently managed its current assets.





c)
2009 Inventory Turnover
uIcs
Incntocs

2,069,032
909,379
2.28x
Industry Average 6.1x
2009 Days Sales Outstanding
Accounts RcccubIc
uIcs

876,897
2,069,032
365
]
154.69 = 155
days



Industry Average 56 days
2009 Fixed Assets Turnover
uIcs
Pxcd Asscts

2,069,032
313,097
6.61x
Industry Average 9.3x

2009 Total Assets Turnover
uIcs
1otuI Asscts

2,069,032
2,298,924
0.90x
Industry Average 2.1x


Everelite`s Iorecasted asset management ratios are stated above. When these ratios are
compared against the industry`s average, it is shown that Everelite is below the standard.
For example, the Inventory Turnover oI Everelite is 2.28 times in a period but the desired
ratio is 6.1 times, there is a diIIerence oI 3.82.


/)
2009 Debt #atio
1otuI LubItcs
1otuI Asscts

1,729,792
2,298,924
0.7524 75.24
Industry Average 50.00
2009 Times-Interest-Earned
EBIT
Intcrcst

161,726
27,434
5.90x
Industry Average 6.2x
Everelite has debt, thereIore they have leverage with their creditors. Everelite`s
debt ratio is 75.24 which is higher than the industry`s 50.00 by 25.24. These ratios
show that the company has a lot oI debt but they have suIIicient Iunds to settle any
interest that may accumulate.


0)
Op07ating Ma7gin EBIT/Sales
161,726/2,069,032
7.82
O It means that in every dollar oI sales, the company can generate 7.82 oI the one-
dollar sales. The operating margin oI Everelite is lower than the industry average.
This Iigure will not make the stockholders` happy because it iust shows that the
operating cost oI Everelite is high. We suggest that Everelite should lower their
cost Ior them to be able to increase their operating margin.
!741it Ma7gin Net Income/Sales
80,575/2,069,032
3.89
O In every dollar oI sales, 3.89 oI that is net income. Everelite increases their
proIit margin Irom 2.89 to 3.89. There is only 1 increase in proIit margin.
It`s still no good because as the proiected proIit increases, Everelite`s proiected
sales decrease. II compared to the industry average, the proiected proIit margin is
still low and should be improve.
asic Ea7ning !407 EBIT/Total Assets
161,726/2,298,924
7.03
O It means that only 7.03 oI the total assets are needed to generate operating
income. Due to low proiected proIit margin and turnover ratios, Everelite`s BEP
ratio is lower than the industry average. Everelite is not managing its assets
eIIiciently because based on the proiected BEP ratio, only a small percentage oI
total assets are used to generate operating income. II only they will use their
assets eIIiciently, their operating income will increase.
#0tu7n 4n Ass0ts Net Income/Total Assets
80,575/2,298,924
3.50
O A 3.50 oI #OA is not a good Iigure to be proiected to investors. It is very low
compared to the industry average which is 6.50. One oI the Iactors that aIIects
the low proiected return on assets is the acquisition oI Iixed assets that resulted to
the increase in depreciation expense and resulted to low net income.
#0tu7n 4n Equity Net Income/Total Equity
80,575/569,132
14.16
O The return on equity oI Everelite is good iI compared to the industry average
which is 12.00. Also the proiected return on equity oI Everelite increases Irom
10.17 to 14.16. The increase oI the proiected return on equity is due to the
decrease oI the proiected retained earnings. Maybe portions oI the 2008 retained
earnings will be invest to other proiects or use as a payment Ior debt.




1)
!7ic0Ea7nings #ati4 Price per share/EPS
19.80/0.81
23.70 times
Ma70t44 #ati4 Market price per share/Book Value per share
19.80/5.69
3.37 times
O Investors expect that the stock prices oI Everelite will increase. Because oI the
recession in 2008, the stock price oI Everelite decrease by $6.2. For 2009
Iorecasts, the investors expect that Everelite will cope with the recession
happened in 2008 and slowly regain the losses they incurred in the recession year.
O The P/E #atio shows us that the investor is willing to pay 23.70 times oI book
value per share. II compared to the P/E ratio in 2008, there is only a small growth
mainly because oI the risks involved in the company. And the company is slowly
coping with the newly Iinished recession. Compared to the industry average, the
Iorecasted P/E ratio is way much better because there is a great diIIerence
between the two.
The M/B #atio oI Everelite is good iI compared to the industry average which is 3.00
times. It means that investors are willing to buy stocks over their book value. Because oI
the high M/B ratio, it explains that Everelite can survive the downs in the business
because Everelite`s value in the market is much greater than their actual value and the
good thing is that the investors are still willing to acquire stocks because they assumed
that Everelite can stand up again Irom the recession and has the capability to generate
income

g)

ro Horn oo ss rnor nonco Iro Hpr

8,
,9,

,9,
,98,9

,98,9
9,


=
8,
,9,

,9,
,98,9
= .%

=
,98,9
9,
= .%


Everlite`s Weaknesses:
O Everlite is not good in its expense control because it has a ProIit Margin
lower than that oI the Industry Average Ior ProIit Margin. The company
does not monitor its expenses extensively that because oI the great amount
oI expenses, the Net Income tends to be at a low range.
O Everlite does not utilize its assets well to generate sales. Its Total Asset
Turnover is again below the Industry Average and that shows that assets
were not used eIIectively to help the company gain sales. Thus, they have
low net incomes Irom 2007 to 2009.

Everlite`s Strengths:
O Everlite`s Iinancial statements and Iinancial ratios don`t give out its maior
strengths because oI the percentages and ratios which are Iar below the
industry average.


h)
When there will be a change in Accounts #eceivable, Sales will not be aIIected.
However, the collection period oI Accounts #eceivable or its DSO could aIIect the stock
price oI a company`s shares in the market. II Everlite was to lower it`s Average
Collection Period or its DSO (Day Sales Outstanding), it would have an increase in its
cash because oI the cash being Ireed. Because oI an addition to cash, Everlite will have
the capacity to repurchase some oI its stocks. It will also have the ability to invest the
cash Ior the company to expand. It could also be that the cash is to be used as payment oI
debts made by the company. All oI these possible actions would increase the stock price
oI Everlite`s shares in the current market.



i)
2007 0.322
2008 0.405
2009 0.439

The management should manage and overlook the increase in the company`s
inventory in a way that it should be less rapid than the increase in sales in order
Ior the company to have a lower inventory to sales ratio. Thus, there will be a
higher proIit and a higher stock price.


j)
II I am the credit manager, I will not continue to sell on credit rather than demand
cash on delivery even iI it might cause Everlite to stop buying Irom the company. II I`m
the bank loan oIIicer, I will demand its repayment. II you are a creditor, you will look on
the capacity oI the debtor iI he is able to pay the debt. The company may be able to pay
the debt but it was Iar beyond the due, which shows that they can hardly say their debt. It
is also shown in their ratio analysis that they have a high debt ratio that puts the company
in a risky situation. Thus, it is also risky Ior creditors to lend money in an unsure
company.


)
Some potential problems and limitations in using Iinancial ratio are as Iollows:
O #atio analysis is more useIul Ior narrowly Iocused Iirms than Ior multidivisional
ones.
O Attaining average perIormance is not necessarily good because most Iirms want
to be better than average. As a target Ior a high-level perIormance, it is best to
Iocus on the industry leaders` ratio.
O InIlation has distorted many Iirms` balance sheets. ThereIore, a ratio analysis Ior
one Iirm over time or a comparative analysis oI Iirms oI diIIerent ages must be
interpreted with care and iudgment.
O Seasonal Iactors can also distort a ratio analysis.
O Firms can employ 'Window Dressing (techniques employed by Iirms to make
their Iinancial statements look better than they really are).
O DiIIerent accounting practices can distort comparisons.
O It is diIIicult to generalize about whether a particular ratio is 'good or ' bad.
O Firms oIten have some ratios that look 'good and others that look 'bad, making
it diIIicult to tell whether the company is on balance, strong or weak.
)
Some qualitative Iactors that analysts should consider when evaluating a
company`s Iuture Iinancial perIormance are as Iollows:
O Are the company`s revenues tied to one key customer? II so, the company`s
perIormance may decline dramatically iI the customer goes elsewhere . On the
other hand, iI the customer has no alternative to the company`s product, this
might actually stabilizes sales.
O To what extent are the company`s revenues tied to one key product?
O To what extent does the company rely on a single supplier?
O What percentage oI the company`s business is generated overseas?
O How much competition does the Iirm Iace?
O Is it necessary Ior the company to continually invest in research and
development? II so, its Iuture prospects will depend critically on the success oI
new products in the pipeline and;
O Are changes in laws and regulations likely to have important implications Ior the
Iirm?