Paper For Above instruction
Introduction
Financial analysis of a corporation is vital in understanding its financial health and operational efficiency. Harris Corporation's financial data provides an opportunity to evaluate its liquidity, profitability, and leverage through various ratios. This paper calculates and interprets crucial financial ratios for the current year based on the provided data, offering insights into the company's performance and financial stability.
Liquidity Ratios
Liquidity ratios assess a company's ability to meet short-term obligations. Two key ratios are the acid-test ratio and the current ratio.
a. Acid-Test Ratio
The acid-test ratio, also known as the quick ratio, measures immediate liquidity by excluding inventories and prepaid expenses from current assets.
The formula:
\[ \text{Acid-Test Ratio} = \frac{\text{Cash} + \text{Accounts Receivable}}{\text{Current Liabilities}} \]
Using the data:
- Cash = $30,600
- Accounts receivable = $33,800 - Current liabilities = $46,000
Calculations:
\[ \frac{30,600 + 33,800}{46,000} = \frac{64,400}{46,000} \approx 1.40 \]
**Interpretation**: An acid-test ratio of 1.40 indicates that Harris Corporation has $1.40 in liquid assets for every dollar of current liabilities, reflecting good short-term liquidity.
e. Current Ratio
The current ratio considers all current assets to current liabilities:
\[ \text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Current Liabilities}} \]
Calculations:
- Total current assets = $108,400
- Current liabilities = $46,000
\[ \frac{108,400}{46,000} \approx 2.36 \]
**Interpretation**: A current ratio of 2.36 suggests the company maintains more than twice the current assets compared to its current liabilities, indicating solid liquidity.
Efficiency Ratios
Efficiency ratios evaluate how effectively the company utilizes its assets.
b. Inventory Turnover
Inventory turnover shows how many times inventory is sold and replaced during the year:
\[ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \]
Average inventory:
\[ \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} = \frac{30,300 + 42,000}{2} = 36,150 \]
Calculations:
\[ \frac{375,960}{36,150} \approx 10.4 \]
**Interpretation**: Harris's inventory turnover of approximately 10.4 times indicates efficient inventory
management, with inventory sold about ten times annually.
c. Days' Sales in Receivables
This measures the average number of days it takes to collect receivables:
\[ \text{Days' Sales in Receivables} = \frac{\text{Accounts Receivable}}{\text{Net Sales}} \times 365 \]
Calculations:
\[ \frac{33,800}{520,125} \times 365 \approx 23.7 \text{ days} \]
**Interpretation**: The company collects receivables on average within approximately 24 days, indicating prompt collection.
Profitability Ratios
Profitability ratios measure the company's ability to generate profit.
d. Book Value per Share of Common Stock
This ratio shows the net asset value attributable to each share:
\[ \text{Book Value per Share} = \frac{\text{Total Stockholders' Equity}}{\text{Number of Shares
Outstanding}} \]
Total stockholders' equity:
\[ \text{Assets} - \text{Liabilities} = (107,400) - (66,000) \]
where:
- Total assets = Current assets + long-term assets = $108,400 + $62,000 = $170,400
- Total liabilities = Current liabilities + long-term liabilities = $46,000 + $20,000 = $66,000
Stockholders' equity:
\[ 170,400 - 66,000 = 104,400 \]
Number of shares:
- 3,000 shares (no par value)
Book value per share:
\[ \frac{104,400}{3,000} \approx \$34.80 \]
**Interpretation**: Each share has a book value of approximately $34.80, suggesting the intrinsic value based on net assets.
e. Price-Earnings (P/E) Ratio
The P/E ratio indicates how much investors are willing to pay per dollar of earnings:
\[ \text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} \]
Assuming the market price per share is not provided, but the earnings per share (EPS):
\[ \text{Earnings per Share} = \frac{\text{Net Income}}{\text{Number of Shares}} = \frac{57,600}{3,000} = \$19.20 \]
If the market price per share is known, P/E can be calculated; without it, an estimation is not possible here.
Financial Ratios Summary
| Ratio | Value | Interpretation | |---------|---------|----------------|
| Acid-Test Ratio | 1.40 | Adequate liquidity |
| Inventory Turnover | 10.4 times | Efficient inventory management |
| Days' Sales in Receivables | 24 days | Prompt receivable collection |
| Book Value per Share | $34.80 | Solid net asset value per share |
| Current Ratio | 2.36 | Strong liquidity position |
Return on Assets and Times-Interest-Earned Ratios
f. Rate of Return on Total Assets (ROA)
ROA measures profitability relative to total assets:
\[ \text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100 \]
Total assets:
\[ 108,400 + 62,000 = 170,400 \]
Calculations:
\[ \frac{57,600}{170,400} \times 100 \approx 33.8\% \]
**Interpretation**: Harris's ROA of approximately 33.8% indicates excellent utilization of assets to generate profit.
g. Times-Interest-Earned Ratio
This ratio measures the company's ability to meet interest obligations:
\[ \text{TIE} = \frac{\text{Income from Operations}}{\text{Interest Expense}} \]
Calculations:
\[ \frac{95,500}{23,500} \approx 4.06 \]
**Interpretation**: The TIE ratio of at least 4 implies Harris can comfortably cover interest expenses four times over, indicating sound debt management.
Conclusion
Harris Corporation exhibits robust financial health characterized by strong liquidity ratios, efficient asset management, and high profitability. Its acid-test and current ratios indicate ample liquidity to meet short-term obligations, while high inventory turnover and quick receivables collections suggest operational efficiency. The substantial return on assets and sufficient times-interest-earned ratio reflect effective management and profitability. Overall, Harris's financial metrics portray a financially stable and efficiently managed enterprise.
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