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Ratio Analysis

690 words - 3 pages

a. 1) Stanley is focusing on maximizing profit, as shown by the increase in net profits over the period 1997 to 2003. His dilemma about adding the software designer, which would depress earnings for the near term, also demonstrates his emphasis on this goal.Maximizing wealth should be the correct goal for a financial manager. Wealthmaximization takes a long-term perspective and also considers risk and cash flows. Profits maximization does not integrate these three factors (cash flow, timing, risk) in the decision process

An agency problem exists when managers place personal goals ahead of corporate goals. Since Stanley owns 40% of the outstanding equity, it is unlikely that an agency ...view middle of the document...

c. Calculation of Operating and Free Cash Flows
OCF = EBIT – Taxes + Depreciation
OCF = $89 – 12 +11 = $88
FCF = OCF – Net fixed asset investment*– Net current asset investment**
FCF = $88 – 15 – 47 = 26
Track Software is providing a good positive cash flow from its operating activities. The OCF is large enough to provide the cash needed for the needed investment in both fixed assets and the increase in net working capital. The firm still has $26,000 available to pay investors(creditors and equity holders)
Ratio Analysis
Track Software, Inc.
Actual Industry Average TS: Time-seriesRatio CS: Cross-sectional

Net working $21,000 $58,000 $96,000 TS: Improving capital CS: Poor
Current ratio 1.06 1.16 1.82 TS: Improving CS: Poor
Quick ratio 0.63 0.63 1.10 TS: Stable CS: Poor Inventory turnover 10.40 5.39 12.45 TS: Deteriorating CS: Poor Average collection 29.6 days 35.3 days 20.2 days TS: Deteriorating period CS: Poor
Total asset 2.66 2.80 3.92 TS: Improvingturnover CS: PoorIndustry
Actual Average TS: Time-seriesRatio 2002 2003 2003 CS: Cross-sectional
Debt ratio 0.78 0.73 0.55 TS: DecreasingCS: Poor
Times interest 3.0 3.1 5.6 TS: Stableearned CS: Poor
Gross profit 32.1% 33.5% 42.3% TS: Improvingmargin CS: Fair
Operating profit5.5% 5.7% 12.4% TS:Improvingmargin CS: Poor
Net profit margin 3.0% 3.1% 4.0% TS: StableCS: FairReturn on total 80%8.7% 15.6% TS:Improvingassets (ROA) CS: PoorReturn on36.4% 31.6% 34.7% TS:Deterioratingequity (ROE) CS: Fair

Analysis of Track Software based on ratio data:
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