Appendix 6C-4 Answer-1

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Apr 3, 2024

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APPENDIX 6C-4 6C-4 KCN Analysis of ratios Answer The following are the observations on ratios which indicate red flags or unusual fluctuations that should be investigated and the reasons for the red flags. 1. RETURN ON TOTAL ASSETS —This ratio indicates the profitability of the company by effectively employing its assets. Across the board increases in Assets (excluding leasehold improvements and intangibles). The main drivers are: Inventory-why the 11% increase in inventory? Are the items not selling? Receivables-Why is there a 20% increase? Cash-Why did it jump nearly 50%? Is it due to an increase in operating cash flow activity of financing activities (debt)? How will cash be used? Net Income-Why did bottom line drop 75%? In 2018, this ratio has declined to 1.7%, which is lower than the industry average of 9%. It has been observed that there was a considerable decline in this ratio in 2018. KCN is not in a position to derive profits from its assets which is much lower than the industry average. The difference is material because of the significant decrease in return on total assets to income. Reasons for this are: an increase in assets and a significant decrease in income.
2. RETURN ON NET WORTH Net income-Why did bottom line drop 75%? Dividend Paid—This is a new account so why did they pay dividends this year? It has been observed that there was a considerable decline in this ratio of about 23%. KCN is not able to effectively generate revenue from its capital. Could be due to and increase in net worth. The difference is material due to a significant decrease as well as the ratio being significantly below industry average. There has been a material decrease in net income. Net worth decreased due to the decrease in retained earnings, caused by the dividend paid out this year. 3. RETURN ON NET SALES Sales-Why the 4% decrease? This ratio indicates the profitability of KCN from its operating activities. In 2018, there was a further decline to from 1.0% to 0.2% which is lower than the industry average of 2.3%. Ratio is material due to the significant decrease which is driven by lower sales and lower net income. 4. TOTAL LIABILITIES TO NET WORTH Credit Line-Why the increased credit line 30%? What is the money being used for? This ratio indicates KCNs ability to meet its long term debt. The solvency position of KCN is healthy in 2018 at 3.5% which is slightly higher than the industry average of 2.9%. 5. CURRENT RATIO The short term solvency position of KCN in 2018 is much better. This is also better than the industry average of 1.3%.
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