Real Chapter 4 Mini Case PDF

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Abdul Abdihalim (250913446) Murat Temeltas (250917683) MOS 3310 Bill Dawson

Company: Hobby Horse Assignment: Mini case Chapter: 4 Financial Ratios

Summary Burchetts Green had enjoyed the bank training course and now he is good to be starting his first real job in the corporate leading group. One morning Greens boss handed him a set of financial statements for the Hobby Horse Company Inc (HH). The company HH has run into some rough weather recently, and Green was asked to go down there that afternoon and see what was happening. Before he was asked to go, he had to take a look at some financial statements and see what kind problems there were. This was Greens chance to use the knowledge he acquired during the training course to make a real impact. Mr. Green was familiar with the HH store. To alleviate these problems Mr. Green decided to start with a 6-year summary of HH’s financial statements such the balance sheet and income statement.

Answers Pr ob l e msf orHHa r ea pp a r e nti nt h ea r e a so fd e b ta nda s s e t s .Le v e r a g er a t i osi mp r o v e d b e t we e n2 0 0 9a n d20 1 3( a l lo fv a r i ou sl e v e r a g eme a s u r e sh a v ede c r e a s e df r o m2 0 0 9t o 2 0 1 3)b u th a v ei n c r e a s e di n2 0 14 . Ta bl e4 . 1 2s h o wst h a tbo t hl o n g t e r ma nds h o r t t e r m d e b t( d e b td u ef o rr e p a y me n t )h a si n c r e a s e ds i gn i fic a nt l yi n2 0 1 4r e l a t i v et o2 0 1 3 . Li q u i d i t yr a t i o sb e g a nt od e t e r i o r a t ei n2 0 10 , a tt h es a met i met h a tt henu mb e ro f e mp l o y e e si n c r e a s e ds u bs t a n t i a l l y .Fu r t h e rd e t e r i or a t i o ni nl i q u i d i t yr a t i o so c c u r r e di n 2 0 1 1, wh e ni n v e n t o r i e smor et h a nd o ub l e da n dc ur r e ntl i a b i l i t i e si n c r e a s e db ymo r et h a n 8 5 %.Att h es a met i me , s a l e sr e ma i n e dv i r t u a l l yunc ha n g e df r o m2 0 1 0 . Ta b l e4 . 1 0s h o wst h a tHo b b yHo r s e( HH)s a l e sh a v eb e e ni n c r e a s i n ge a c hy e a r , s i nc e 2 0 0 9. Al s ot h en umb e ro fs t o r e sa n dt h en u mb e ro fe mp l o y e e sh a v ei n c r e a s e de a c hy e a r . Bu ti th a sn e g a t i v eEBI Ta ndn e g a t i v en e t i nc o mei n2 0 1 4 , de s p i t et h ef a c tt ha tb o t hh a v e b e e ni n c r e a s i n gf r om2 0 0 9t o2 0 1 3. Tob e t t e ru n de r s t a n dwh a ti sg o i n go ni tus e f ult ol o o k a tfin a nc i a lr a t i o s . Ke yfin a n c i a lr a t i o sc a l c ul a t e dwi t ht h efin a n c i a lh i g h l i g h t sa r er e p o r t e di nt het a b l eb e l o w a n db e l o wt h a ta r ea d d i t i o n a lr a t i o sf o r20 1 4u s i n gt h e2 0 1 4fin a n c i a ls t a t e me nt s . Sa l e sg r o wt hr a t ei sv a r i a b l eb u ta l wa y sp o s i t i v e .Th ec o mp a n yh a si n c r e a s e dt hen u mbe r o fs t o r e sa n di t se mp l o y e e sbu ts a l e sp e rs t o r ea nds a l e sp e re mp l o y e ea r eno ts t a y i n g c o n s t a n to ri n c r e a s i n ga tas t e a d yr a t e .

Th e2 0 1 4l e v e r a g ea n dl i qu i d i t yr a t i oss h o wt h a tHob b yHo r s ei sc u r r e n t l ye x p e r i e n c i n g s omed i ffic u l t y . Al t h o u g hl o n g t e r m de b t l e v e r a g er a t i o si mp r o v e db e t we e n2 0 0 9a n d 2 0 1 3( a l lo fv a r i o usl e v e r a g eme a s u r e sh a v ed e c r e a s e df r o m2 0 09t o2 0 1 3 )b u th a v e i n c r e a s e di n2 0 14 . Th el i q u i d i t yme a s u r e s( t i me si nt e r e s te a r ne d ,c u r r e n tr a t i oa ndn e t wo r ki ngc a p i t a lt ot o t a la s s e t s )f o r2 0 0 9t o2 0 1 3d on o ti n d i c a t el i q u i d i t yc r i s i s .I nt h os e y e a r st h et i me si n t e r e s te a r ne dwa sg e n e r a l l yr i s i ng , a n da r ou n d4t on e a r5 , wh i c ha r e s t r o n gn u mb e r s .Al s oc u r r e n tr a t i osa r eb i g g e rt h a n1wh i c hi si n d i c a t e sl i q u i di t y . Bu ti n 2 0 1 3c u r r e n tr a t i oa n dn e two r ki n gc a p i t a lt ot o t a la s s e tr a t i o sf e l la l t h ou g ht i mei n t e r e s t e a r ne di n c r e a s e d .Th i ss u g g e s t st h a tt h efir mc u r r e nta s s e t so rc u r r e ntl i a b i l i t i e sc h a ng e d i n2 0 1 3 .Th e s el i q u i di t yme a s u r e sa r et h ewo r s ti n2 0 1 4 .Th ef a c tt ha tt i mei n t e r e s te a r n e d i sn e g a t i v ea n dc u r r e ntr a t i oi sl e s st ha no n ei n di c a t e sl i q u i d i t yi s s u e sf orHH. Th e n e g a t i v er a t i oo fne two r ki n gc a p i t a lt oa s s e t si n di c a t e st h a tc ur r e n tl i a b i l i t i e si n2 0 14a r e g r e a t e rt h a nc u r r e n ta s s e t s , a no t he ri nd i c a t o ro fpo o rl i q u i d i t y . Th e2 01 4qu i c ka n dc a s h r a t i o si nt h es e c o ndt a b l eb e l o wa r eb o t hl e s st h a n1 ,o t h e ri n d i c a t o r so fc u r r e ntl i q ui d i t y i s s ue sf o rHH. Ta b l e4 . 1 2s h o wst h a tb o t hl o n gt e r ma n ds h or t t e r md e b t( de b td u ef o rr e pa y me n t )h a s i n c r e a s e ds i g n i fic a nt l yi n2 0 1 4r e l a t i v et o2 0 1 3 .Th e s er e s u l t sc o u l db ed u et oas i n g l e p o o rChr i s t ma ss e a s o nc o mi n ga tat i meo ft o o r a pi dgr o wt h ,r a t h e rt h a nb e i n gi nd i c a t i v e o fal o n g t e r mun s u s t a i n a b l eb u s i n e s ss i t u a t i o n .I nt h i sr e g a r d, i ti si n t e r e s t i n gt oc omp a r e Ho bb yHo r s e ' sfin a n c i a lr a t i o swi t ht h o s eo fo t he rr e t a i l e r s( Ta b l e4. 7 ) .Co mp a r i n gHH’ s 2 0 1 4p e r f o r ma n c ewi t ht h er a t i o si nTa b l e4 . 7 , r e v e a l st h a tHHi smo r eh i g h l yl e v e r e d , muc hl e s sp r o fit a b l ea n dl e s sl i q ui dt h a no t h e rr e t a i l e r s .Ho we v e r , i fy o uu s e2 0 1 2 ’ s p e r f or ma n c e , HHl o o k smu c hmo r el i k et h ea v e r a g e ,a l t h o u ghi ts t i l ls e e mst omo r e l e v e r e db u th a sh i gh e rop e r a t i n gr e t u r no na s s e t sa n dROEt h a na v e r a g e . Ov e rt i meHH’ sa s s e tt u r n o v e rh a si n c r e a s e db uti tf e l li n2 0 1 4 . Yo uc a ns e ei nTa bl e4 . 1 2 t h a ti n v e n t or i e si n c r e a s ei n2 0 1 4r e l a t i v et o2 0 1 3 .Th i si sl i k e l ydu et ot h ep o o rs a l e sa t Ch r i s t ma s . Thec o mp a n yh a dp u r c h a s e dt h ei n v e n t o r i e sf o rt h eCh r i s t ma ss e a s o nb u tt he y d i dn o tg e ts o l d . No wl o oki n ga tt h ev a r i o u sme a s ur e so fpr o fit a b i l i t ys h o wst h ep oo rfin a n c i a lpr o fiti nt h e 2 0 1 4. No t i c et h a tROA, o pe r a t i n gr e t u r no na s s e t sa n dROC( r e t ur no nc a p i t a l )we r e g e n e r a l l yr i s i n gf r o m2 0 0 9t o20 1 3 .ROA’ s“ Du Po n tf a c t or s , ”op e r a t i n gp r o fitma r g i na nd a s s e tt u r no v e r ,a l s og e n e r a l l yr o s ef r o m2 0 0 9t o2 01 1.Bo t ht h el e v e la n dt h et r e n do f ROAwo u l ds e e mt oi n di c a t eas u c c e s s f u lu n d e r l y i n gbu s i n e s s .Co n s i s t e ntwi t ht h e a p p a r e n ts uc c e s so ft hefir m,ma na g e me n tha sb e e ns t e a d i l ye x p a n d i n gt h eb u s i n e s s , wi t h s l o wb u ts t e a d yg r o wt ho fa s s e t sf r o m$ 9 59mi l l i oni n2 0 09t o$ 1 , 2 4 9mi l l i o ni n2 01 3 ( 6. 8 %c omp o u n de da n n u a lgr o wt h ) .Th e7 2 . 5 %g r o wt hi na s s e t sf r o m2 0 1 3t o2 0 1 4i sf a r mor ea g g r e s s i v e .Bu tt h i si sl i k e l yd u et oe x c e s s i v ei n v e n t or ydu et ol e s ss a l e st h a n p l a n n e df o r . Ra t i osb a s e do nt h emo s tr e c e n ty e a r ’ ss t a t e me n t sha v ed e t e r i or a t e d .Lo s s e sh a v e a p p a r e n t l yc r e a t e dt hen e e df o ra d d i t i o n a lb or r o wi n g :l o n g t e r md e b ta n dt hed e b t e q ui t y r a t i oh a v ebo t hi n c r e a s e d .As s e tt u r n o v e ri sd o wn , p r e s u ma b l yd u et ot her a p i de x p a n s i o n

o fa s s e t si nt hef a c eo ffla ts a l e s .Ofp a r t i c ul a rc on c e r ni st h er a p i dg r o wt ho fi n v e n t or i e s , f r o m$ 2 0 3mi l l i o nt o$ 47 9mi l l i o n .Da y so fp r od u c t ss i t t i n gi ni n v e n t o r yi sc u r r e nt l y88 d a y s . Th i sma yr e fle c ti np a r tap a r t i c u l a r l yb a dChr i s t ma ss e a s o n . Ano b v i o u squ e s t i o ni s wh e t h e rt h eu n s o l di n v e n t o r yh a sa n ys u b s t a n t i a lv a l u e . I ft hee x t r ai n v e nt o r yi sj u s ta n u n a n t i c i p a t e db u i l du pofg o o d sa n dc a nb es o l di nt h en e x tf e wmo nt h s , t he ni ti sno t o v e r l ywo r r i s o me .Bu ti fi twi l ln e v e rb es o l da n di se ffe c t i v e l ywo r t hl e s s , t h e nt h efir m’ s d e b t e q u i t yr a t i oi smu c hh i g h e rt h a ni ta p p e a r s . Th efir mi se n c o u n t e r i n gd i ffic ul t i e s , b u ti nt hel o n gt e r mi ts e e msl i k eas i t u a t i o nt h a tc a n b es a l v a g e d .Th eun d e r l y i n gb u s i n e s sr a t i o ss e e ms t a b l e , a ndt h er e c e n tpr o b l e mss e e m d u et ot o o r a pi de x p a ns i o n.Th efir mh a sa l r e a d ya c t e dt or e v e r s et h es i t u a t i o nb ys e l l i n g 1 5o fi t ss t or e s , wh i c hwi l lb r i n gt ot a ls t o r e sa l mos tb a c kt ot h e2 01 3l e v e l .I ft her e c e n t d i s a pp o i n t i n gCh r i s t ma ss e a s o ni si n d e e dab l i p , r a t h e rt h a nas i g n a lofl o n g l i v e d d o wn t u r ni ng e n e r a le c o n o mi cc o nd i t i o n s , t h efir ms ho u l db ef u l l ya b l et or e t u r nt oi t s f o r me r l ys t r o n ge c o n omi cp o s i t i o n. Ast hefir ms e l l so ffa s s e t s , t h eb a n ks h o u l dd e ma n da sac on d i t i o nofr e ne wi n gt h el o a n t h a tt h er e v e n u ef r o mt h ea s s e ts a l e sbeu s e dt oi mp r o v et h efir m’ sl i q u i di t yr a t i o . Wi t h $ 4 8 4mi l l i o no fd e b td u ef o rr e pa y me n t( s e eSFPi nTa b l e4 . 1 2 ) , t h ec o mp a n yc l e a r l yh a s ar e fina n c i n gp r o bl e m.Se l l i ngo ff1 5s t or e sp r o b a b l ywo n ' th e l pmu c hh e r e .I two u l db e i mp o r t a n tt oa s kt h ec o mp a n ya b o u ti t sp l a n st od e a lwi t ht h ed e b tr e p a y me n t . NOTE:Di ffe r e n td e fin i t i on so fv a r i o u sr a t i o sa r er e po r t e db e l o w.Th eb i gi s s u ei swh e n c o mp a r i n gav a l uef r o ma ni n c o mes t a t e me n twi t hav a l u ef r o mt hes t a t e me n to ffin a n c i a l p o s i t i o n( b a l a n c es he e t ) . Doy o uu s et h es t a t e me n to ffin a n c i a lp o s i t i o na tt h eb e g i nn i n g o fy e a r , t h ee n doft hey e a rort h ea v e r a g eo ft h eb e g i n n i n ga n de n do ft h ey e a rv a l u e s . Yo u wi l ls e et h a tt h et r e n d sa r eg e n e r a l l ys i mi l a rr e g a r d l e s sofwh i c hr a t i od e fin i t i o ni su s e d . NOTE:Sa l e sg r o wt hr a t ec a l c u l a t i onf o r mul a Le tgb et h ea n nu a ls a l e sgr o wt hr a t e :So2 0 1 4Ne tSa l e s=( 1 +g )2 0 1 3Ne tSa l e So l v ef o rt h e20 1 4a n n ua ls a l e sg r o wt hr a t e :g=( 2 0 1 1Ne tSa l e s / 2 0 1 3Ne tSa l e s )1 Key Financial Ratios 2009 – 2014 2014 2013 2012 Annual sales growth rate Annual asset growth rate Number of employees per store =Employees/Number of stores Sales per store = Net Sales/number of stores Sales per employee = Net Sales/employees Long-term debt ratio=Long-term debt/(Long-term debt+equity) Long-term Debt-Equity ratio =Long-term debt/Equity

2011

2010

0.011 0.275

0.165 0.004

0.018 0.116

0.122 0.113

0.154 0.045

2009

54.404

53.552

46.493

53.207

53.382

49.841

13.963

14.995

13.483

15.196

14.665

13.758

0.257

0.280

0.290

0.286

0.275

0.276

0.259

0.180

0.331

0.383

0.439

0.493

0.349

0.219

0.496

0.620

0.784

0.972

Debt-to-asset ratio=Total liabilities/Total assets (Total Liabilities = Current liabilities + Long-term Debt) Times Interest Earned =EBIT/Interest Current ratio =Current assets/Current liabilities NWC/Total assets=(Current assets - Current liabilities)/total assets Asset Turnover =Net Sales/average assets Asset Turnover =Net Sales/end of year assets Asset Turnover =Net Sales/start of year assets Tax rate NOPAT =Net income +(1-tax rate) x interest Operating profit margin =NOPAT/Sales Operating profit margin =(NI + interest)/Sales Return on assets, ROA = NOPAT/assets at start of year ROA = NOPAT/(assets at end of year) ROA = NOPAT/(average total assets) Total Capital =long-term debt + equity Return on capital, ROC = NOPAT/(start of year total capital) Return on capital, ROC = NOPAT/(end of year total capital) Return on capital, ROC = NOPAT/(average total capital) ROE =Net income/equity at start of year ROE =Net income/equity at end of year ROE = Net income/average equity

0.575

0.420

0.518

0.550

0.594

0.662

-0.243

4.952

3.938

4.190

4.417

3.391

0.984

1.285

1.411

1.440

1.420

1.322

-0.007

0.083

0.115

0.119

0.116

0.107

2.359

2.659

2.412

2.641

2.543

2.105

2.653

2.287

2.508

2.488

2.252

2.683 0.240 20.880

2.664 0.240

2.552 0.240

2.790 0.240

2.600 0.240

0.240

236.88

194.40

186.08

161.48

110.96

-0.006

0.071

0.068

0.067

0.065

0.051

-0.004

0.076

0.074

0.072

0.069

0.056

-0.017

0.190

0.174

0.186

0.168

-0.013

0.190

0.156

0.167

0.161

-0.015

0.190

0.165

0.176

0.165

912.00

884.00

896.00

813.00

726.00

-0.024

0.264

0.239

0.256

0.253

-0.023

0.268

0.217

0.229

0.222

-0.023

0.266

0.228

0.242

0.237

-0.068

0.316

0.289

0.349

0.386

-0.072 -0.070

0.261 0.285

0.242 0.263

0.283 0.312

0.307 0.342

0.116

639.00

0.174

0.235

Addi t i o na lRa t i o sf o r2 0 1 4

Cash coverage ratio =(EBIT + depreciation)/interest Quick ratio=(cash and cash equivalents+trade receivables)/current liabilities Cash ratio=(cash and cash equivalents)/current liabilities Inventory turnover=COGS/(average inventories) Inventory turnover=COGS/(2014 inventories)

Ratios 4.054 0.279 0.021 5.836 4.154

Days in inventory=(average inventories)/(COGS/365) Days in inventory =(2014 inventories)/(COGS/365) Receivables turnover = sales/(average trade receivables) Receivables turnover = sales/(2014 trade receivables) Collection period (days)=(average trade receivables)/sales/365 Collection period (days)=(2014 trade receivables)/(sales/365) Trade payables turnover = COGS/(average trade payables) Trade payables turnover = COGS/(2014 trade payables) Payment period(days)=(average trade payables)/(COGS/365) Payment period(days)=(2014 trade payables)/(COGS/365) Payout ratio=Dividends/net income

62.545 87.857 18.114 19.040 20.151 19.170 42.340 21.170 13.940 17.241 0...