Apex Corporation Case Analysis - Coursework Example

of the of the Submitted Apex Corporation Case Introduction Accounting can be baffling to some and truly intelligible to others. Like it or not, accounting is the language of business and even the best of times won’t last if the numbers don’t make any sense. The bottom line is always the profit or loss and the sales that one can accomplish over the course of the year. Of course, the most astute business and financial managers are always looking at investment and financing opportunities so that the business can expand and prosper. Conversely, the owners may just be satisfied with a business size that suits their managerial capabilities. Whatever the size of the business, it is the financial health that matters the most to all stakeholders (Meigs & Meigs, 10). In the given assignment, I have to assume that I am an attorney and that a client has approached me to consider whether a managerial position at Apex Corporation would be good to take up. He is already impressed with the salary and benefits they are offering but has no knowledge of accounting or finance. So I am going to have to advise him after looking at Apex’s financial statements for 2001, as the assignment criteria limits our evaluation to this year only. However we might make comparisons between the years 2000 and 2001 Analysis of Financial Statements The financial statements of a corporate enterprise, namely the income statement and the balance sheet are two of the most important summaries of the business activities that have occurred over the last financial year. We are told that the Apex Corporation is a local manufacturing firm. The third statement that has also found to be of use to stakeholders is the Statement of Cash Flow, which shows how the firm used the cash generated in financing, investment and production activities. Negative or troubling cash flow situations are often the first sign of distress in a business, occurring long before telltale signs emerge on its income statement and balance sheet. The most common ratios that can be calculated for a corporate business entity using ratio analysis are the Current Ratio, the Debt-Equity Ratio, the Receivables Turnover, the Gross Profit percentage, the Net Profit percentage and the Inventory Turnover. This will give an analyst a good picture of the financial strength and viability of the business. Another approach would be a year to year comparison of results, using the common size income statement and balance sheets for 2000 and 2001. Calculation of Financial Ratios Proceeding with our calculations, we first have the Current Ratio, which is calculated as: Total Current Assets / Total Current Liabilities. For Apex Corporation, this is: For Year 2000: $3,415,807/ $1,546,107= 2.21: 1. For Year 2001: $4,257,700/ $1,616,700= 3:1. So we find that Current Ratio has improved from 2.21:1 in 2000 to 3:1 in 2001. This indicates that there are now more current assets to cover current liabilities. The working capital which is defined as Total Current Assets – Total Current Liabilities, has improved from $1,869,700 in 2000 to $2,614,000 in 2001. This speaks well of the company’s short term liquidity and solvency. However, we would have to compare it to Industry Averages for the manufacturing sector to be more accurate in our perceptions (Meigs & Meigs, 943). Moving on to the Debt-Equity Ratios, the ratio of Total Debt to Total Assets can be calculated by Total Liabilities / Total Assets. For Year 2000 it is $2,296,107/ $5,615,807 or 0.41: 1 and for Year 2001 it works out to $2,466,700/$5,697,700 or 0.43:1. This means that debt was 41 cents to the dollar for each $1 of assets owned by Apex Corporation in 2000, and this increased slightly to 43 cents to the dollar in 2001. In other words we can say that each $1 of assets of Apex Corporation was financed 41percent by debt in 2000 and 59 percent by equity; this changed to 43 percent debt and 57 percent equity in 2001. Coming now to the Gross Profit Margin, this is given by: Gross Profit/ Sales x 100. For Apex Corporation, in Year 2000, Gross Profit Margin was $3,640,000/ 10,400,000 x 100, or 35 percent of sales revenue. In Year 2001, Gross Profit Margin was $5,250,000 / 13,400,000 x 100 or 39.18 percent of sales revenue. This means that the Gross Profit margin improved by 4.18% over the period. Calculating the Net Profit Margin or the net income as a percentage of sales revenue, we have for Year 2000 the figures of $718,200/$10,400,000 x 100 or 6.91 percent. In Year 2001, Net profit percentage is $1,020,000/$13,400,000 x 100 or 7.61 percent. This means that net profit went up a little in 2001 compared to 2000. However, we must remember that this was not strictly the result of operational activities, since there was an extraordinary gain from the sale of land amounting to $450,000 in 2001. Relating to Receivables Turnover, this figure for Apex Corporation in 2000 is calculated by Accounts Receivable / Sales Revenue or $1,000,000/ $10,400,000 which gives a turnover of 9.62 times. Conversely we can say that the days required to convert accounts receivable to cash are 360/ 9.62 or 38 days (assuming a 360 day year). This could be good or bad when compared to other firms in the same sector. In 2001, the Receivables Turnover for Apex Corporation is $1,550,000/ $13,400,000 or 12 times. So we can say that the days required to convert accounts receivable to cash are 360/12 or 30 days, which shows an improvement in the collections area. Another interesting ratio that can be of use especially to my client who wants to join the firm is the Interest Coverage Ratio. This is expressed by EBIT/ Interest Expense (Meigs & Meigs, 936). For Year 2000 this calculation would be $1,300,000 / 103,000 or 12.62 times. In 2001 it works out to $1,820,000/ $210,000 or 8.67 times. This shows that the Interest Coverage ratio has dropped from 12 to 8 times over one year and this could likely be explained by the fact that there have been repayments of debt and a sizeable dividend paid to stockholders in 2001. Now we will look at the Return on Assets and Return on Equity ratios for Apex Corporation. While the first ratio reflects the amount of income that each dollar of assets generated for the business, the second ratio gives us an idea of the return on the owner’s equity of the firm. For 2000, the ROA for Apex Corporation is calculated by Net Income/ Total Assets = $718,200/ $5,615,807 x 100 or 13 percent. For 2001, the ROA would be $1,020,000/ $5,697,700 or 18 percent. This shows that the ROA has improved by 5 percent over the period. The ROE for Apex Corporation is calculated by Net Income/ Total Owners Equity = $718,200/ $3,319,700 x 100 or 22 percent. For 2001, the ROA would be $1,020,000/ $3,231,700 or 31.56 percent. So we can see that ROE too has improved by 9.56 percent over the period. In fact, both ROA and ROE have shown an improvement in 2001 compared to 2000. Taking into account the Inventory Turnover, which is given by Cost of Goods Sold/ Year End Inventory. For 2000 for the Apex Corporation, this amounts to $6,760,000/ $1,690,000 or 4 times. This indicates that it took 360/4 or 90 days to convert inventories into sales in 2000. For 2001, this ratio amounts to $8,150,000/ $250,000 or 32 times. This drastic change has been possible through a reduction in inventory values. In other words, it took just 360/32 or 11 days to convert inventories to sales in 2001. Due to this stunner, some accountants would prefer that the Cost of Goods Sold be divided by Average Inventory in order to give a more reliable and believable figure for Inventory Turnover. Discussion-Should My Client Accept the Position at Apex Corporation? Coming back to the all important question of should my client accept the managerial position offered to him by Apex Corporation, I would feel that the most important ratios in this context are those that relate to the liquidity, solvency, debt-equity mix and turnover for the firm during the period. We can see that working capital has increased for Apex Corporation over the period, signaled by an improvement in current ratio from 2.2 to 3 times over the year. Also its debt to asset ratio of 41 percent in 2000 and slight increase to 43 percent in 2001 shows that more that 50 percent of the business is controlled and financed by owner’s equity. There is no fear that debt will override the balance sheet. The important consideration of whether the firm has enough money to meet its short term debt obligations- interest expenses- are indicated by the Interest Coverage Ratio of 12 times in 2000 and though this has temporarily dropped to 8 times in 2001 largely due to debt repayment and dividend payouts, there is no need to worry even if one were a creditor. The retained earnings of $2,456,000 in 2001 and owner’s equity component of more than 50 percent of the total assets of the business give further stability to the firm. I think that my client should join the firm without too much hesitation. The firm has also been achieving a good ROA and ROE (18 percent and 31.56 percent in 2001) and has been making dividend payouts to its shareholders, so they should be in no mood to divest of their ownership anytime soon. The business is profitable as indicated by the healthy Gross Margin percentages (35 and 39 percent) and Net Profit percentages (6 and 7 percent) in both the years. Conclusion On the basis of the review of the financial statements and the subsequent ratio analysis of the firm, I will be advising my client to join Apex Corporation in a managerial position without further delay. Much would also depend on the working atmosphere and culture of the organization. However, on the basis of the financial results they are producing, the decision to join is recommended. Works Cited Meigs, R.F & Meigs, W.B. Accounting: The Basis for Business Decisions, Ninth edition, 1993. McGraw Hill, Inc. Print. Read More