Author Question: The following ratios have been calculated for Hi-Tech Toys. Analyze the capital structure, long-term ... (Read 58 times)

lb_gilbert · **on:** Jul 6, 2018

The following ratios have been calculated for Hi-Tech Toys. Analyze the capital structure, long-term solvency, and profitability of Hi-Tech Toys.

Financial ratios
2015 2014

Leverage

Debt ratio () 65.3 57.2
Long-term debt to total capital () 46.8 17.6
Times interest earned (times) (1.5) 3.9
Cash interest coverage (times) 4.1 9.2
Fixed charge coverage (times) (0.4) 2.8
Cash flow adequacy (times) 0.3 0.8
Profitability
Gross profit margin () 54.7 58.6
Operating profit margin () (2.3) 7.4
Net profit margin () (3.4) 4.7
Cash flow margin () 4.3 8.9
Return on assets () (3.1) 3.2
Return on equity () (10.7) (9.9)
Cash return on assets () 3.8 8.4

What will be an ideal response?

Question 2

Assuming the use of special journals, the sale of merchandise to Jerri Wiles on account would be recorded in the
a. sales journal.
b. accounts receivable journal.
c. purchases journal.
d. cash receipts journal.
e. cash payments journal.

TINA · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Hi-Tech Toys' capital structure is more risky in 2015 compared to 2014 . The firm has increased debt from 57.2 to 65.3 of assets. The long-term debt to total capitalization ratio indicates that much of the debt added to the firm's capital structure is long-term. As a result of increased debt and lack of profitability in 2015, the company can no longer cover interest and lease expenses with profits; however, cash generated from operations is still enough to cover the actual cash payments in 2015 for interest and leases.

Profitability is deteriorating at Hi-Tech Toys. The gross profit margin has declined 3.9 indicating that either costs are increasing or selling prices are being lowered. Hi-Tech Toys needs to control costs better or pass increased costs onto customers to improve the gross profit margin. Operating and net profit in 2014 have turned to losses in 2015 . Further investigation of the cause of these losses is warranted. Due to the financial leverage used in the firm, the effect on return on equity has been magnified in both 2014 (positively) and in 2015 (negatively). As stated previously, despite the accrual-based losses the firm has incurred, Hi-Tech Toys still generates positive cash from operations. Cash flow margin and cash return on assets have declined from the 2014 levels but are still positive. Hi-Tech Toys' long-term solvency is adequate. The increased use of debt is probably a result of the underlying causes of the profit deterioration.

Answer to Question 2

a