Business Valuation 601million to $10.4 million. Debt consists of real estate mortgage notes, term
loans, a revolving line of credit, and obligations under capital leases.
Over the past five years, the shareholder equity increased from $6.7 mil-
lion to $11.4 million. Shareholder equity decreased slightly as a percentage of
total liabilities and equity over the past five years.
Income Statement Analysis
Victoria also prepares Exhibit 18.2 that presents ACME’s historic income
statements in condensed form for the past five years. She also prepares Exhibit
18.3, which is a graph of ACME’s annual revenues for the previous five years.
It graphically shows the revenue amounts from Exhibit 18.2 and more clearly
shows the revenue growth trend. The company had a compounded annual
growth rate in revenues of 11.1% during the previous five years and 3.5% for
the most recent year. ACME’s revenue growth rate over the past five years was
substantially higher than the 5.6% revenue growth reported by the chemical
products industr y.
Cost of goods sold as a percentage of revenues f luctuated between 66.6%
and 69.9% over the past five years. Operating expenses, exclusive of officers’
compensation, ranged from 9.8% to 11.8%. The overall trend is up.
ACME reported consistent profitability during the past five years. In
1996, income before officers’ compensation and taxes was $6.5 million ($4.31+
$2.23). For 2000, it increased to $8.7 million ($5.29+$3.38).
Ratio Analysis
Victoria also prepares Exhibit 18.4 that presents various financial operating
ratios of ACME for the past five years. The liquidity ratiosindicate the ability
of ACME to meet current obligations as they come due. The current ratio
decreased from 1.9 to 1.0 during the five-year period. Working capital also de-
creased from $4.2 million to $190,000 during the same five-year period. These
indicate the company has a greater risk in being able to pay its bills.
The activity ratiosindicate how effectively a company is utilizing its as-
sets. The average number of days in ACME’s accounts receivable was similar
over the past five years at approximately 50 days. However, the average num-
ber of days inventory remained at the plant before being sold decreased from
58 days to 47 days. The average number of days of accounts payable was simi-
lar during the five-year period at 48 days.
The coverage ratiosindicate a company’s ability to pay debt service. The
number of times interest was earned, as measured by earnings before interest
and taxes (EBIT) divided by interest expense, decreased from 8 to 7 times.
The leverage ratios generally indicate a company’s vulnerability to busi-
ness downturns. Highly leverage firms are more vulnerable to business down-
turns than those with lower debt-to-worth positions. ACME’s debt to tangible
worth increased in the past five years from 1.5 to 1.8. Fixed assets to tangible
worth increased from 1.0 to 1.5.