Page 86 - Financial Statement Analysis

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Chapter One | Overview of Financial Statement Analysis 63

Refer to Campbell Soup Company’s Campbell Soup Company CASE 1–5
financial statements in Appendix A. Financial Statement
Required: Ratio Computation
Compute the following ratios for Year 11.
Liquidity ratios: Asset utilization ratios:*
a. Current ratio n. Cash turnover
b. Acid-test ratio o. Accounts receivable turnover
c. Days to sell inventory p. Inventory turnover
d. Collection period q. Working capital turnover
Capital structure and solvency ratios: r. Fixed assets turnover
e. Total debt to total equity s. Total assets turnover
f. Long-term debt to equity Market measures (Campbell’s stock price per share is
g. Times interest earned $46.73 for Year 11):
Return on investment ratios: t. Price-to-earnings ratio
h. Return on total assets u. Earnings yield
i. Return on common equity v. Dividend yield
Operating performance ratios: w. Dividend payout rate
j. Gross profit margin ratio x. Price-to-book ratio
k. Operating profit margin ratio
l. Pretax profit margin ratio
m. Net profit margin ratio
* For simplicity in computing utilization ratios, use end-of-year values and not average values.

Explain and interpret the major business activities—namely, planning, financing, investing, and CASE 1–6
operating. Aim your report at a general audience such as shareholders and employees. Include Describe and Interpret
concrete examples for each of the business activities. Business Activities

As controller of Tallman Company, you are responsible for keeping the board of directors CASE 1–7
informed about the company’s financial activities. At the recent board meeting, you presented the Ethics Challenge
following financial data:
2006 2005 2004 2006 2005 2004
Sales trend percent....................... 147.0% 135.0% 100.0% Accounts receivable turnover...... 7.0 times 7.7 times 8.5 times
Selling expenses to net sales........ 10.1% 14.0% 15.6% Total asset turnover .................... 2.9 times 2.9 times 3.3 times
Sales to plant assets .................... 3.8 to 1 3.6 to 1 3.3 to 1 Return on total assets ................ 9.1% 9.7% 10.4%
Current ratio ................................. 2.9 to 1 2.7 to 1 2.4 to 1 Return on stockholders’ equity.... 9.75% 11.50% 12.25%
Acid-test ratio............................... 1.1 to 1 1.4 to 1 1.5 to 1 Profit margin............................... 3.6% 3.8% 4.0%
Merchandise inventory turnover.... 7.8 times 9.0 times 10.2 times

After the meeting, the company’s CEO held a press conference with analysts in which she
mentions the following ratios:
2006 2005 2004 2006 2005 2004
Sales trend percent........................ 147.0% 135.0% 100.0% Sales to plant assets ......... 3.8 to 1 3.6 to 1 3.3 to 1
Selling expenses to net sales ......... 10.1% 14.0% 15.6% Current ratio ...................... 2.9 to 1 2.7 to 1 2.4 to 1
Required:
a. Why do you think the CEO decided to report these 4 ratios instead of the 11 ratios that you prepared?
b. Comment on the possible consequences of the CEO’s reporting decision.