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)
2019 2020 2021Est.
Assets
Cash and equivalents 62 52 52
Short-term investments 102 12 52
Accounts receivable 402 522 532
Inventories 640 840 680
Total current assets 1,206 1,426 1,316
Net fixed assets 2,920 3,520 3,720
Total assets 4,126 4,946 5,036
Liabilities and equity
Accounts payable 330 430 365
Notes payable 182 252 120
Accruals 200 240 272
Total current liabilities 712 922 757
Long-term bonds 800 1,100 1,100
Total liabilities 1,512 2,022 1,857
Common stock (100,000 shares) 1,000 1,000 1,000
Retained earnings 1,650 1,924 2,216
Total common equity 2,650 2,924 3,216
Total liabilities and equity 4,126 4,946 5,036
Income Statement (millions of Dollars)
2019 2020 2021Est.
Net sales 6,500 7,000 7,600
Cost of goods sold 4,400 4,800 5,320
Depreciation 292 322 372
Other operating expenses 360 400 410
Earnings before interest and taxes (EBIT) 1,448 1,478 1,498
Less interest 68 108 100
Pre-Tax earnings 1,380 1,370 1,398
Taxes (25%) 345 343 350
Net Income 1,035 1,028 1,049
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
ROA 25.6% Current 2
ROE 36.5% Quick 0.85
P/E ratio 9.4 Debt ratio 30.0%
1. 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.
2. Calculate the following profitability ratios for Hemingway Corporation for 2020:
i. Operating profit margin
ii. Return on assets (ROA)
iii. Return on equity (ROE)
iv. Basic Earning Power (BEP)
3. Calculate the following asset management ratios for Hemingway Corporation for 2020:
i. total assets turnover
ii. Fixed assets turnover
iii. Inventory turnover
4. Calculate the following liquidity and debt management ratios for Hemingway Corporation in 2020:
i. Current ratio
ii. Quick ratio
iii. Debt ratio
5. Explain trend analysis. Calculate the projected profitability ratios for Hemingway Corporation for 2021.
6. Using the trend analysis indicate whether the financial performance of Hemingway Corporation has improved or worsened over the years.
7. Explain benchmarking. Indicate whether the asset management ratios of the company have improved or worsened relative to the industry.
8. 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.
Ratio
Profit margin 16.0%
Total assets turnover 1.6
Equity multiplier 1.7
Calculate the Return on Equity (ROE) for Hemingway Corporation for 2022.
9. Mike Schenk explains to the CEO that although 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.
10. 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.
Submit your answers in a Word document.
