Case 9.3.

1 Mega Company
1. The information where we can obtain a companys earnings as a
percentage of sales is found in the INCOME STATEMENT.
2. Mega Companys earnings as a percentage of sales for 2010 was
PHP 2,614 divided by PHP 97,538, or 2.68%.
3. This indicated a DECREASE from 3.60% in 2009.
4. The decline in profitability was a result of AN INCREASE in cost
of goods sold as a percentage of sales, and from AN INCREASE
in operating expenses as a percentage of sales. The only
favorable factor was the reduction in the INCOME TAXES.
5. Mega Company had a total of PHP 45,560 invested in assets at
year-end 2010, and EBIT of PHP 5,056 during 2010.
6. In 2010, this figure was 11.10% which indicated a DECREASE
from the 17.21% earned in 2009.
7. Mega Company had PHP 24,386 of shareholders equity, and
earned PHP 2,614 after taxes in 2010. Its return on equity was
10.72% earned in 2009.
8. The asset turnover in 2010 can be computed by dividing PHP
97,538 by PHP 45,560. The turnover had deteriorated from
2.17 TIMES in 2009 to 2.14 TIME in 2010.
9. Mega Company invested PHP 14,760 in accounts receivable at
year-end 2010 and sold PHP 97,538. The accounts receivable
turnover is 6.61 TIMES, an IMPROVEMENT from 6.22 TIMES in
2009.
10.
Its accounts receivable collection period was 55.22 DAYS
in 2010, an IMPROVEMENT from the 2009 level of 58.68 DAYS.
11.
Mega Company needed PHP 16,440 of stocks at year-end
2010 to support its sales. The inventory turnover during the year
is 3.61 TIMES, a DETERIORATION from the 2009 level of 4.76
TIMES.
12.
The average stocking period in 2010 is 101.11 DAYS, a
DETERIORATION from the 76.68 DAYS in 2009.
13.
The Mega Company invested PHP 10,320 in fixed assets
in 2010, and sold PHP 97,538 in the same year. The capital
intensity ratio for 2010 was 9.45 TIMES, compared to 7.98
TIMES in 2009, an IMPROVEMENT.
14.
There are three profitability ratios calculated, which are (i)
RETURN ON SALES, (ii) RETURN ON ASSETS, and (iii)
RETURN ON EQUITY.
15.
Four activity ratios were also discussed and calculated.
These are (i) ASSET TURNOVER, (ii) ACCOUNTS RECEIVABLE
TURNOVER, (iii) INVENTORY TURNOVER, and (iv) CAPITAL
INTENSITY RATIO.

16.
The deterioration in the operating profits of Mega Company
as a percentage of total assets between 2009 and 2010 primarily
resulted from XXXXXXX.
17.
The total debts of Mega Company as of December 31, 2010
were PHP 21, 174 or 46.47% of total assets. This represented a
DECREASE from 48.55% as of December 31, 2009.
18.
The times interest coverage of Mega Company for 2010
was calculated by dividing EBIT of PHP 5,056 to interest
payment of PHP 1,034. This figure was 4.90 TIMES, which is a
DETERIORATION from the 2009 level of 7.12 TIMES.
19.
The debt to equity ratio of Mega Company in 2010 was
86.83% compared to 2009 of 94.34%. This means that the
company has become LESS RISKY.
20.
Assuming that the depreciation in 2010 was Php 5,000 and
Php 3,000 in 2009 and fixed payments of Php 3,000 and Php
2,000 in 2009, the fixed payments coverage ratios for the two
years were XXXX in 2010 and XXXX in 2009. It
IMPROVED/DETERIORATED.
21.
Mega Company owed its suppliers Php 5,640 at the end of
2010. This represented 9.49% of cost of goods sold and an
INCREASE from 8.42% at the end of 2009. The company
appears to be LESS prompt in paying its suppliers in 2010 that it
was in 2009.
22.
The deterioration in the profitability of Mega Company as
measured by its return on equity, from 15.22% in 2009 to
10.72% in 2010 resulted in the combined impact of XXXX.
23.
The financial riskiness of the company
INCREASED/DECREASED between 2009 and 2010.
24.
The 2010 current ratio of the company was 1:2.34,
calculated by dividing current assets of PHP 35,240 to current
liabilities of PHP 15,062. This is a DETERIORATION from the
2009 level of 1:2.41.
25.
The quick ratio of Mega Company at the end of 2010 was
1:1.25, a DETERIORATION from the ratio of 1:1.52 at the end
of 2009.