Brandon's Auto Supply Company

Transcription

1 Balance Sheet at June 30, 20XX Brandon's Auto Supply Company Vertical Analysis 20X9 % 20X8 % 20X7 % Current Assets Cash $ 88, % $ 104, % $ 117, % Accounts receivable $ 117, % $ 107, % $ 106, % Inventory $ 675, % $ 564, % $ 427, % Total Current Assets $ 881, % $ 775, % $ 651, % Fixed Assets Gross property, plant, and equipment $ 430, % $ 420, % $ 420, % Accumulated depreciation $ (130,000) -11.0% $ (97,000) -8.8% $ (65,000) -6.5% Net property, plant, and equipment $ 300, % $ 323, % $ 355, % Total Fixed Assets $ 300, % $ 323, % $ 355, % Total Assets (Investments) $ 1,181, % $ 1,098, % $ 1,006, % Current Liabilities Notes payable $ 192, % $ 155, % $ 103, % Current maturities of l-t debt $ 30, % $ 30, % $ 30, % Accounts payable $ 180, % $ 160, % $ 157, % Accrued expenses $ 45, % $ 58, % $ 71, % Total Current Liabilities $ 448, % $ 404, % $ 361, % Long-Term Liabilities Long-term debt $ 370, % $ 400, % $ 430, % Total Long-Term Debt $ 370, % $ 400, % $ 430, % Total Liabilities (Debt) $ 818, % $ 804, % $ 791, % Owners' Equity Equity $ 363, % $ 294, % $ 215, % Total Owners' Equity $ 363, % $ 294, % $ 215, % Total Liabilities and Equity (Financing) $ 1,181, % $ 1,098, % $ 1,006, % Horizontal Analysis 20X9 % 20X8 % 20X7 % Current assets $ 106, % $ 123, % Long-term assets $ (23,000) -2.1% $ (32,000) -3.2% Total assets (Investments) $ 83, % $ 91, % Debt $ 13, % $ 12, % Equity $ 69, % $ 79, % Total Liabilities and Equity (Financing) $ 83, % $ 91, % Sales $ 198, % $ 148, %

2 Brandon's Auto Supply Company Income Statement at June 30, 20XX Vertical Analysis 20X9 % 20X8 % 20X7 % Sales $ 1,650, % $ 1,452, % $ 1,304, % Cost of goods sold $ 1,344, % $ 1,161, % $ 1,043, % Gross profit $ 305, % $ 290, % $ 260, % Depreciation $ 33, % $ 32, % $ 35, % Lease payments $ 12, % $ 11, % $ 11, % Other operating expenses $ 60, % $ 56, % $ 53, % Operating profit $ 199, % $ 190, % $ 160, % Interest expense $ 84, % $ 58, % $ 39, % Earnings before tax $ 115, % $ 132, % $ 121, % Income tax $ 46, % $ 52, % $ 48, % Net profit $ 69, % $ 79, % $ 73, % Horizontal Analysis Sales Trend $ 198, % $ 148, %

3 Cash Flow from Operating Activities 20X9 20X8 20X7 Net income (accounting profits) $ 69,450 $ 79,392 $ 73,008 Depreciation $ 33,000 $ 32,000 $ 35,000 Accounts receivable $ (10,784) $ (509) $ (7,900) Inventories $ (111,100) $ (136,924) $ (27,500) Accounts payable $ 19,450 $ 3,550 $ 2,400 Accrued expenses $ (13,404) $ (12,632) $ 4,300 *Cash Flow from Operating Activities (Cash profits) $ (13,388) $ (35,123) $ 79,308 * Internal financing Brandon's Auto Supply Company

4 Brandon's Auto Supply Company 20X9 20X8 20X7 >/< Change (9-8) S/W Return on Equity (A x B x C) 19.09% 26.97% 33.96% -7.88% Return on Assets (A x B) 5.88% 7.23% 7.25% -1.35% Return on Equity Drivers (A x B x C) 20X9 20X8 20X7 >/< Change (9-8) S/W Net profit margin (A) 4.2% 5.5% 5.6% -1.3% Total asset turnover (B) Financial leverage (C) Margins (A) 20X9 20X8 20X7 >/< Change (9-8) S/W Gross profit margin 18.5% 20.0% 20.0% -1.5% Operating profit margin 12.1% 13.1% 12.3% -1.0% Net profit margin (A) 4.2% 5.5% 5.6% -1.3% Turnover (B) 20X9 20X8 20X7 >/< Change (9-8) S/W Accounts receivable in days Inventory in days Fixed asset turnover Total asset turnover (B) Return on Assets 5.88% 7.23% 7.25% -1.3% Financial Leverage (C) 20X9 20X8 20X7 >/< Change (9-8) S/W Payables in days Assets to equity (Financial Leverage C) Debt to assets Debt to equity L-T debt to equity Times interest earned Cash and Liquidity Net working capital $ 433,842 $ 371,392 $ 290,000 $ 62,450 Current ratio Acid test ratio Cash flow from operations (cash profits) $ (13,388) $ (35,123) $ 79,308 $ 21,735 Net income (accounting profits) $ 69,450 $ 79,392 $ 73,008 $ (9,942) Cash profits Accounting profits No No Yes Cash Conversion Cycle (CCC) 20X9 20X8 20X7 >/< Change (9-8) S/W Inventory investment Accounts receivable investment Trade/Operating Cycle Accounts payable financing CCC

5 Financial Highlights Brandon's Auto Supply Company ROE Trend is downward and declining all three years. 20X7 to 20X8 declined by 6.99% & 20X8 to 20X9 declined by 7.88%. Total decline over the last three years of 14.87%. These are alarming trends keeping in mind a movement of.50% is significant. Breakdown the components to determine which one is driving the poor operating performance. Profit margin is declining, leverage is decreasing and turnover is improving. Stress to the class the drastic impact to the ROE ratio when earnings are declining. Earnings decreased by 1.4% over three years and the impact on ROE was a decline of 14.87%! ROA Trend is downward and declining all three years. 20X7 to 20X8 declined by.02% & 20X8 to 20X9 declined by 1.35%. Total decline over the last three years of 1.37%. These are alarming trends keeping in mind a movement of.50% is significant. Breakdown the components to determine which one is driving the poor operating performance. To focus in on what component of ROE is driving the poor operating performance it is clear that profit margin is the problem area. Turnover is improving. Margins Gross profit margins were steady from years 20X7 to 20X8 and declined by 1.5% from 20X8 to 20X9. Again, stress the significance of a.50% or 50 basis point movement in margins. Cost of goods are increasing, why? Revenues are increasing (27% over the last three years). Operating profit improved by.80% from 20X7 to 20X8 and declined 1.0% from 20X8 to 20X9. Emphasize the impact of poor gross margins and a decline in operating earnings have on net profit margin. Interest expense continues to increase which is evident by the increase in debt being carried on the balance sheet. Interest expense has increased by 2.1% over the last three years. Review with the class the importance in understanding absolute dollar values compared to relative percentages. When analyzing the numbers alone would give the analyst a since that the company is improving across the board. Point out the movement in absolute sales dollars and cost of goods sold and then point out the relative percentage changes in margins. The class has to understand how important it is to common size to utilize the relative importance of ratios. Earnings decreased by 1.4% over three years and the impact on ROE was a decline of 14.87%. Turnover Total asset turnover has improved each of the three years. A total improvement of.10 times. The first observation should be to the movement in total investments: trend is up. The second observation should be the movement in sales: trend is up. It should be pointed out when total asset turnover is increasing, sales are growing faster than investments: why? Focus on the two major operating accounts: inventory and accounts receivable, and fixed assets. Fixed assets are declining as a percentage of investments over the last three years by 9.9%. Stress to the class when long-term investments are declining, short-term investment should be increasing. Short-term investments have increased over the last three years by the same. The major contributor to the increase in short-term investments is inventory. Inventory grew to represent 57.2% of all investments and 77% of all current investments (675,550/881,874). Go to ratios and discuss both Inventory and accounts receivable in days. There has been a slight improvement in the collection of receivables by almost one day. Inventory however increased to days or an increase of 6 days. Take a look at the cash conversion cycle to determine the

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10 Turnover net trade cycle of days in 20X9, days in 20X8 and days in 20X7. The trend is up and some of the reason for high debt levels and the causes for interest expense to impact the overall operating earnings performance. Go to the cash flow statement and observe the cash impact on these investment changes from year to year. It is clear that inventory is consuming the majority of operating cash profits from operations. Over the last three years inventory has consumed $275,524 and again the use of debt was required to finance this investment. The cost was charged in the income statement as interest expense. Leverage Go over the debt ratios and the impact on the reliance of debt financing to earnings. The third component of return on equity indicates a leverage of 3.2 in year 20X9. Leverage has declined over the last three years by 1.5. Take a look at risk: Debt to equity had declined indicating the risk in doing business with Hit Hard has shifted to the owners and away from the debtors. Debt to equity was 2.25 to 1 in 20X9 down from 3.68 to 1 in 20X7. Long-term debt to equity has also declined indicating an increase in short-term debt compared to long-term debt. The common size balance sheet indicates total debt of 69.2% and equity of 30.8% in 20X9. Of the 69.2% of debt used to finance this company, 37.9% is current debt and 31.3% is long-term debt in 20X9. This has been the trend over the last three years. Accounts payable in days indicates the company is paying their bills faster. In 20X9 they were paying their bills in 48.2 days. Cash and liquidity Net working capital was $433,842 in 20X9. Working capital has increased over the last three years primarily due to the build up of inventory, which is not very liquid as indicated by the days that is takes to move inventory. The current ratio indicates a 1.97 to 1 in 20x9 and has improved over the last three years. Again, the reason was the build up in inventory which is not very liquid. The acid-test ratio actually indicates the actual liquid cash level and that was.46 to 1 in 20X9. Explain to the class the effect of liquidity when inventory is removed from the equation. Go over the cash conversion cycle and all three components. Stress the effect of a lengthening cash conversion cycle and the impact on the cost to borrow money. Make light of interest expense and the amount of debt the company has used to support a build up in inventory. Times interest earned indicates the current impact: in 20X9 the company could cover interest expense only 2.38 times. In the year 20X8 they could cover interest 3.28 times and in 20X7 they could cover interest 4.11 times. The cash flow from operations indicates a use of cash in both years 20X9 and 20X8. Accounting profits were declining but positive. The major use of cash in operations were centered in inventories.