You have just been hired as a stock analyst for a large stock brokerage company. Your first assignment is to analyze the performance of Gidley Electronics. The company's balance sheet for 2019 and 2020 follows.
The company's income statement and reconciliation of retained earnings for the years ended December 31, 2020 and 2019, are presented below.
The market prices of the company's stock as of January 1, 2019, December 3 1, 2019, and December 31, 2020, were $65, $69, and $54 per share, respectively. The January 1, 2019, balance in shareholders' equity was $450,000, there were no changes in the number of common shares outstanding or in accounts receivable during 2019, and the income tax rate was 40 percent for 2019 and 2020. Total assets as of January 1, 2019, were $1,450,000. Assume the number of shares outstanding was 17,000 at year end 2018 and 2019 and 22,000 at year-end 2020.
INSTRUCTIONS:
Answer the following questions (including any relevant ratios in your answers) for both 2019 and 2020. Unless the December 31, 2018, balance is provided, assume that the December 31, 2019, balance reflects the average balance during 2019.
l. How effective is the company at managing investments made by the equity owners?
2. Is the company using debt in the best interests of the equity owners?
3. Can the company meet its current obligations using current assets? Using cash-like assets?
4. How sensitive are stock prices to changes in earnings?
5. How many days is the average account receivable outstanding? Are the days outstanding increasing or decreasing?
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