Presented below are financial statements for Brownsville Industries:

Brownsville Industries

Balance Sheet

At June 30

Cash
$26,000
Short-Term Investments
51,000
Accounts receivable (net)
125,000
Merchandise Inventory
82,400
Property, Plant, and Equipment, net
325,000
Intangible Assets
19,500
Total Assets
$628,900

Current Liabilities
$97,500
11% Bonds payable, long-term
200,000
Common Stock
10,000
Paid in Capital
40,000
Retained Earnings
281,400
Total Liabilities and Equity
$628,900

Brownsville Industries

Income Statement

For the Year Ended June 30

Sales
$750,000
Cost of Goods Sold
395,000
Gross Profit
$355,000
Operating Expenses
155,400
Operating Income
$199,600
Interest Expense
22,000
Income before Income Taxes
$177,600
Income Taxes
53,280
Net Income
$124,320

Prior year data

Total Assets
$525,000
Shareholders' Equity
220,000

Compute the following ratios
a. Current ratio
b. Debt to Equity Ratio
c. Interest Coverage Ratio.
d. Return on Assets
e. Financial Leverage.
f. Return on Equity

What do these ratios reveal about the financial condition of Brownsville Industries?

What will be an ideal response?

Answer:
Ratio
Computation
Answer
Current
$(284,400 / 97,500)
2.92x
Debt/Equity
$(297,500 / (331,400 + 220,000) / 2)
108%
Interest Coverage
$(124,320 + 53,280 + 22,000) / 22,000)
9.07x
Return on Assets
$124,320 / ((628,900 + 525,000) / 2)
22%
Financial Leverage
((628,900 + 525,000) / 2) / (331,400 + 220,000) / 2)
52%
Return on Equity
$(124,320 / (331,400 + 220,000) / 2))
11%

Without prior year comparisons, it is difficult to make any definite assessment of this company's financial condition. However, based on this data, the company has sufficient current assets to cover its liabilities. It is heavily reliant on debt financing, but has enough income to service its debt. Its ROA and financial leverage result in a modest return on equity.