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Recommendation Email Essay

996 words - 4 pages

statement of cash flows, cash provided by operating activities is intended to indicate the cash-generating capability of the company. Analysts have noted, however, that cash provided by operating activities fails to take into account that a company must invest in new property, plant, and equipment(capital expenditures) just to maintain its current level of operations. Companies also must at least maintain dividends at current levels to satisfy investors. A mea surement to provide additional insight regarding a company's cash-generating ability is free cash flow. Free cash flow describes the cash remaining from operating activities after adjusting for capital expenditures and dividends paid.
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RATIO ANALYSIS
The following information is available for Ozone Inc.
2012 2011
Current assets $ 88,000 $ 60,800
Total assets 400,000 341,000
Current liabilities 40,000 38,000
Total liabilities 120,000 150,000
Net income 100,000 50,000
Cash provided by operating activities 110,000 70,000
Preferred stock dividends 10,000 10,000
Common stock dividends 5,000 2,500
Expenditures on property, plant, and equipment 45,000 20,000
Shares outstanding at beginning of year 60,000 40,000
Shares outstanding at end of year 120,000 60,000


a. Compute earnings per share for 2012 and 2011 for Ozone, and comment on the change. Ozone's primary competitor, Frost Corporation, had earnings per share of $2 in 2012. Comment on the difference in the ratios of the two companies.
b. Compute the current ratio and debt to total assets ratio for each year, and comment on the changes.
c. Compute free cash flow for each year, and comment on the changes.


Action Plan

• Use the formula for earnings per share (EPS): .
• Use the formula for the current ratio: .
• Use the formula for the debt to total assets ratio: .
• Use the formula for free cash flow: .


Solution

a. Earnings per share
2012 2011

Ozone's profitability, as measured by the amount of income available to each share of common stock, increased by 25% [ ] during 2012. Earnings per share should not be compared across companies because the number of shares issued by companies varies widely. Thus, we cannot conclude that Frost Corporation is more profitable than Ozone based on its higher EPS.
b. 2012 2011
Current ratio
Debt to total assets ratio

The company's liquidity, as measured by the current ratio, improved from 1:60:1 to 2.20:1. Its solvency also improved, as measured by the debt to total assets ratio, which declined from 44% to 30%.
c. Free cash flow
2012:
2011:

The amount of cash generated by the company above its needs for dividends and capital expenditures increased from $37,500 to $50,000.

Summary of Study Objectives


1. Identify...

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