 Interpret each ratio by comparing both years

PART-1
Liquidity Ratios
 Current Ratio: Current Ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations or those due within a year. The higher the better so the company
performed better in 2018 than in 2017. However, since the ratio is less than 1 in both
years this means the company has fewer current assets than liabilities and Creditors
would consider the company a financial risk because it might not be able to pay its short-
term obligations.
 Quick Ratio: Quick ratio measures the ability of a company to use its near cash or quick
assets to extinguish or retire its current liabilities immediately. It is better measure
because inventory is less liquid. So the company was slightly more able to liquidate in
2017 with a ratio of 0.42 than in 2018. But then again since the values are less than 1, this
indicates that company has more liabilities than assets and an overall poor performance
and is considered a financial risk.
Asset Management Ratios
 Inventory Turnover: Inventory Turnover measures how many times a company sold its
total average inventory during the year. It compares cost of goods sold with inventory
because cgs directly measures the cost at which product is sold. The company did better
in 2017 with inventory turning over 17.54 times than 10.83 times in 2018 indicating that
inventory was better managed in 2017.
 Day sales outstanding: is the average number of days’ receivables remain outstanding
before they are collected. So the company did better in 2017 with 5.44 days than 5.56
days in 2018 which indicates the company's effectiveness in 2017 of its credit and
collection efforts in allowing credit to customers as well as its collection.
 Fixed assets turnover: indicates how well the business is using its fixed assets to
generate sales. The company was more effective in 2017 with 20.58 sales generated from
its fixed assets than 18.20 in 2018.
 Total Assets turnover: measures the company's use of its assets in generating sales
revenue. So again the company did better in 2017 with a higher ratio indicating the
 company's ability to efficiently produce sales using its assets.
Debt Management Ratios
 Debt ratio: measures the extent of a company's leverage. The lower it is the better
indicating there are less chances of the company going bankrupt. Hence, the company
performed better in 2017 with debt ratio of 1.7%, meaning the creditors have less claims
on company's assets.
 Liabilities to assets ratio: is a solvency ratio which examines how much of a company's
assets are made of liabilities. Comparatively, the company's liabilities in 2017 are lesser
than 2018 but since in both years the ratio is 90% above so the company performed poor
as the risk that the business will not generate enough cash flow to service its debt
increases.
 Times-Interest-earned Ratio: It is a measure of a company's ability to meet its debt
obligations based on its current income. The higher the more favorable so the company
performed better in 2017 with 183.28 times interest earned than 124.74 in 2018
indicating the company presents less of a risk to investors and creditors in terms of
solvency.
 EBITDA Coverage: ratio is a solvency ratio that measures a company's ability to pay off
its liabilities related to debts and leases using EBITDA. The higher the better hence the
company performed better in 2017 than in 2018.
Profitability Ratios
 Profit Margin: is a measure of profitability. This means that the company was more
profitable in 2018 with 13.90% than 13.53% in 2017 indicating that the company was
able to control its costs that buy goods and services at prices significantly higher than it
costs to produce or provide them.
 Basic earning power: measures the earning power of a business before the effect of the
business ‘income taxes and its financial leverage. The higher the better so the company
earned more in 2017 with 142.82% than in 2018.
 Return on assets shows the percentage of how profitable a company's assets are in
generating revenue. And again the company did better in 2017 with higher percentage
showing the company is earning more money on less investment.
  Return on equity shows the profitability in terms of how well a company uses
investments to generate earnings growth. Overall performance of the company was good
in both years but comparatively the company did better in 2018 suggesting that company
is increasing its ability to generate profit without needing as much capital and is
deploying the shareholder's capital well.
Market Value Ratios
 Earnings per share: It tells us how much money the company is making in profits per
every outstanding share of stock. The higher the better hence, the company did better in
2018 with $0.28 indicating that investors are willing to pay this much for higher profits.
 Price-to-earnings ratio: Measures the share price relative to the annual net income
earned by the firm per share. And again the company did better in 2017 than in 2018
because a higher ratio indicates that investors expect higher earnings.
 Cash flow per share: It functions as firm's financial strength. The higher the better
hence, the company did good in 2018 with $0.52 cash flow per share which is more than
0.42 in 2017.
 Price-to-cash flow ratio: It is a stock valuation indicator which measures the value of
stock's price relative to its operating cash flow per share. The company performed 2 times
better in 2017 than in 2018
 Book Value per share: Value of shares in a company's financial records, it weighs
stockholder's equity against shares outstanding. It is $0.03 in both 2017 and 2018
indicating there's no change.
 Market-to-book ratio: Evaluates a company's current market value relative to its book
value. The company did better in 2017 with 1146.81 indicating the stock is overvalued
than it was in 2018.
 a. Has Company's liquidity position improved or worsened? Explain.
The company's current ratio has improved from 0.74 to 0.79 in 2018 but the quick ratio fell from 0.42 to 0.41 in 2018 indicati
Company’s liquidity position has worsened. Since both these ratios measure the liquidity of the company by measuring how w
assets could cover the current liabilities, and both the current ratio and quick ratios are less than 1, this suggests that company
Current liabilities than current assets. This means the company's performance is poor and its liquidity position is worsening, w
Creditors considering the company a financial risk because it might not be able to easily pay down its short-term obligations.

b. Has Company's ability to manage its assets improved or worsened? Explain.

Asset Management Ratios tells how efficiently a company is using its assets in the generation of revenues. Company's ability to
assets into the sales have worsened since 2017. Inventory turned over 17.54 times in 2017 and 10.83 times in 2018 clearly indic
Average number of days receivables remain outstanding before they are collected are 5.56 days in 2018 and 5.44 days in 2017,
the more effective, this suggests that in 2018 the company's credit and collection efforts in allowing credit to customers and its c
Worsened. Fixed assets turnover was 20.58 in 2017 and 18.18 in 2018, indicating that the company had more sales using its fix
2017 than in 2018. Total assets turnover was more in 2017 than in 2018, which means in 2017 the company's sales using its tota
was 6.82 and 4.79 in 2018, a clear representation of company's position worsening. Considering these 4 ratios, the company did
2017 than in 2018 which shows the company's ability to manage its assets has worsened.

c. How has Company's profitability changed

over the years?
The profitability ratios assess a company's ability to generate revenue, relative to its sales, operating
costs, balance sheet assets and shareholders’ equity. The company's profitability has decreased over
a year. Profit margin was 13.53% in 2017 and 13.90% in 2018, which suggests that the company
was able to control its costs that buys goods and services at prices higher than its cost to produce or
provide them in 2018 which were increased from 2017. Basic earning power was also 142.82% in
2017 which fell to 103.26% in 2018. Return on assets was 92.32% in 2017 which decreased to
become 66.58% in 2018, showing a major decrease in percentage of how profitable the company’s
assets were in generating revenue. In general, the return on equity was very high in both the years
indicating that the company was doing good but when it comes to change in profitability over the
years so there has been a major increase from 1003.54% in 2017 to 1078.43% in 2018 suggesting
that the company is increasing its ability to generate profit without needing as much capital and is
deploying the shareholder's stocks. Thus, proving that the company has been slightly profitable in
2018 but its basic earning power had a decrease.

d. What do you suggest the company on the debt management ratios?

The debt management ratios measures how much of a company's operations comes from debt
instead of other forms of financing, such as stock or personal savings. Over the span of one year,
from 2017 to 2018 the company's debt management has seen a fall. The debt ratio was 1.7% in
2017and increased to 18.3% in 2018, this large change in percentage indicates that the company's
bankruptcy rate has increased and it does not have as such of financial leverage anymore. Liabilities
to asset ratio has also seen an increase from 90.8% in 2017 to 93.8% in 2018 showing the liabilities
are a lot more than assets and also there's a high risk that the business will not generate enough cash
flow to service its debt increase. Similarly times-interest-earned ratio and EBITDA coverage ratio
saw a major decline from 2017 to 2018 showing that its ability to pay off its liabilities is decreasing.
To decrease its debt the company should increase sales revenue by raising prices and reducing costs.
There should be more effective inventory management and restructuring of existing debt. If the
company is paying high interest rates on its loans and currents interest rates are lower so it should
refinance its existing debt to reduce interest expense and monthly payments which will increase its
cash flows.

e. Do you think the company has added value in the market? If Yes, explain. If No, what could
be the reasons for poor performance?
No, the company is seeing a major decline from 2017 to 2018 so it has not added value in the
market. Although the earnings per share increased from $0.26 to $0.28 and the cash flow per share
also elevated $0.42 to $0.52, the price-to-earnings ratio, price-to-cash flow ratio and market-to-book
ratio has decreased over a year indicating that the current share price of the publicly held company's
stock is under-priced and can be a bad investment compared to the share price in 2018. Company's
poor performance is to blamed on its liquidity position, the company has too many short-term
obligations that it cannot cover. Deflation, economic outlook, high interest rates which affects its
cost of debt, demand and supply of the shares, dividend expectations and political climate are also
the reason for this downfall.
f. Perform an extended Du Pont analysis of the Company for 2018-19 and 2017-18.
The return on equity has increased from 1003.54% in 2017 to 1078.43% in 2018, that’s because the
profit margin has improved and equity multiplier too saw a rise from 10.87 in 2017 to 16.20 in 2018
however, the total assets turnover had a decline over the year from 6.82 to 4.79.
PART-2

Interpret the calculation process in detail that includes how ratios are calculated for each
item, how they are used for forecasting items, followed by line of credit and special
dividends.

In this part the values of the financial statements were given and the forecasting basis was
also given. We had to calculate the percentages/ historical ratios. After calculating the ratios
we had to forecast the future values. The sales are growing at the rate of 3%. The sales
increased from $214,211,920 in 2018 to $220,638,278 in 2019. He expenses are 7.7% of the
sales. The depreciation and amortization is $9,667,289. The forecasting basis is % of fixed
assets. Depreciation over fixed assets gave us the historical ratio on which we calculated the
depreciation of 2019 the interest rate is 11%.According to the forecasting basis we took the
average of long term debt of year 2018 and 2019 and then we multiplied it with 11%. The tax
is 35%. 35% of EBT is deducted from the EBT. The common dividends are growing by
10%.special dividends are given on special circumstances. If He Company is profitable only
then special dividends are considered. If the company is going in loss then zero special
dividends are paid. Here the company is profitable and giving $122,980,548 special
dividends .The balance sheet is forecasted by the same way. The forecasting basis is % of
sales in most of the values. The line of credit is 0. Basically we can analyze that the company
is in surplus. The finances of the company are more than the total assets. The forecasting
suggests that Shell can give special dividends in year 2019this tells that the company will
have spare money to give as special dividends. If the company was going in deficit then the
company would need are line of credit. This would be done to overcome the access amount
the company spent on total assets. Total assets would exceed total financing.
 PART-3

Comment on the spread of ROIC and WACC over the projected years.

Spread is representation of company value. A company creates value only if its ROIC value is
higher than its weighted average cost of capital as long as the spread between ROIC and WACC
is positive it means new growth creates value for 2019-20.It is negative which means the
company has more ROIC as compared to WACC shows the firm destroyed its value by taking
new projects after this year it’s positive for all the remaining years.We calculate this by dividing
ROIC with weighted average cost these positive spread is showing good position of the company
the more positive spread they have the company is growing faster and creates more value.

How is the value of operations calculated? What value of operations and MVA suggest
about the company?

The value of operation is calculated through using npv formula in which we use the given rate of
WACC and also all the FCF and horizon value we calculate the last FCF by adding horizon
value into long term FCF growth. MVA is an indication of its shareholder capacity to increase s
hare holder value over time it is an evidence of strong management and strong operational
capabilities. As our firm has positive so it has created wealth for our shareholders it is the sum of
all capital claims held against the company plus the market value of debt and equity.Value of
operations tell us about firm’s performance and financial position it summarizes the company’s
revenue and expenses over period of time.

State your concluding remarks about the company based on Part a, b, c, d and e of Part 3.

 Part A is showing that the company is in good position and it has all the values positive in
it the stock price of the company and new issues of common stock are projected on these
statements.
 In part B we calculated free cash flows which shows how much cash a company
generates after accounting for capital expenditures such as building etc. we calculated
and see that there was constant growth from last 2 years.
 In part C we see that firm ROIC and spread between WACC and ROIC is negative which
means firm destroyed its image from 2019 to 2020 it improved for remaining years
 Part D value of operations and MVA both are positive. Positive MVA means that
company is performing well and can increase its shareholders.
 In part E the price per share is calculated which is positive this tells if the share is worth
buying or not to the shareholders it has 2.1 price per share which shows that people
would consider this firm for buying shares