Using the financial statements you have prepared for the Behrend Company, complete the following questions. Use your Excel horizontal and vertical analyses to answer the following.
Income Statement Analysis
- By how much did net sales increase or (decrease) from 2012 to 2013? $__147600____
By how much is it predicted to increase from 2013 to 2014? $ 957700___________
- By what percentage did net sales increase or (decrease) from 2012 to 2013?
16.5%
By how much is it predicted to increase from 2013 to 2014? 0.1%
- Net sales can change either due to the quantity sold, or because the same quantity is sold at a different price. What is the reason for the Net Sales change for this company?
Increase in the quantity sold
- What was the COGS Percentage for the first year of operations (2012)? –56.9%
What was the COGS Percentage for the second year of operations (2013)? 42.88%
What is the COGS Percentage projected for the third year of operations (2014) 45%
- Cost of Goods Sold (“COGS”) decreased from the first year to the second year, and from the second year to the third year. Normally, we would expect that when sales increase, the cost of those sales would also increase. How could a large increase in the quantity sold help lower the cost of each unit being purchased or manufactured for sale?
Purchasing of bulky commodities lowers the transportation cost and vendors lower the unit cost per item purchased when purchased in a bulk. As such, high sales make necessitates bulky purchasing which benefits from this cost reductions.
- How much is the Company’s total gross margin in dollars in 2012? $__386400______
In 2013? $__596300____________ In 2014? $___631620_______________
- What is the total gross margin percent in:
2012: 43.1%
In 2013: 57.12%
In 2014: 55%
- How much is the Company’s operating expenses in dollars
In 2012: $362000
In 2013: $237300
In 2014: $576770
- What is the operating expenses percentage?
In 2012: -40.4%
In 2013: 22.73%
In 2014: 50.22%
- What would cause operating expenses to decrease from the start-up year until the first full year, and then increase as a percentage of net sales as they ramped up their operations?
The decrease in the operating expense from the startup year to the full year can be attributed to the increase in economies of scale where the company produces more products for the same fixed costs. When ramping up the operations the net sales reduces and the operating expenses remain similar or reduce slightly compared to the net sales. This causes the percentage of operating expense to net sales to increase when ramping up the operations.
Balance Sheet Analysis
- Using your Vertical Analysis for your balance sheet, list the two assets that represent the largest percentage impact on total assets at the end of 2014.
Percentage of
ASSET Total Assets
- ___Total liabilities __________________ __71.48%
- ___Cash______________________________ __64.36%____
- Using your Horizontal Analysis for your balance sheet, list the two assets that increased or decreased by the largest dollar amount, from 2013 to 2014.
Increase/(Decrease)
ASSET in Dollars
- _cash ________________________________ _$__644 800________
- _Inventory _____________________________ _$__294623_________
- Using your Horizontal Analysis for your balance sheet, list the two assets that increased or decreased by the largest percentage from 2013 to 2014.
Increase/(Decrease)
ASSET in Percentage
- _Inventory ____________________________ ____52%____
- ________cash ________________________ ________102%____
- Using your Vertical Analysis for your balance sheet, list the two Liabilities/Stockholders’ Equity items that represent the largest percentage impact on total liabilities/shareholders’ equity at the end of 2014.
Percentage of
LIAB/STOCKHOLDERS’ EQUITY Total Liab/Equity
- __Accounts payable ______40.8%____
- ______Common equity ____________ _____39.2%____
- Using your Horizontal Analysis for your balance sheet, list the two Liabilities/Stockholders’ Equity items that increased or decreased by the largest dollar amount from 2013 to 2014.
Increase/(Decrease)
LIAB/STOCKHOLDERS’ EQUITY in Dollars
- _utilities payable____ _$576770
- __Retained earnings___ $ 455851
- Using your Horizontal Analysis for your balance sheet, list the two Liabilities/Stockholders’ Equity items that increased or decreased by the largest percentage from 2013 to 2014.
Increase/(Decrease)
LIAB/STOCKHOLDERS’ EQUITY in Percentage
_____wages payable ____________________________ _$___-92.54%________
- _______interest payable ____________________________ _$___-92.47__________
Ratio Analysis
Compute the following ratios for the projected 2014 (budgeted) operations. The 2013 analysis is completed. Indicate in the far right column if the Company expects to get BETTER based on their budget, have NO CHANGE, or get WORSE based on each ratio. Do your work in the boxes provided below.
- TESTS OF LIQUIDITY (Measures a company’s ability to pay debt in the short term):
| Liquidity Ratios |
2014 |
2013 |
Analysis? ( Better / Worse / No Change)
|
| 1) Working Capital |
822000 |
223,370
|
Better
|
| 2) Current Ratio |
1.75 |
2.75
|
Worse |
| 3) Quick Ratio |
1.12 |
2.73
|
worse |
| 4) Accounts Receivable Turnover (use net sales and ending A/R balance)
|
10.6 x |
4.37x
|
better |
| 5) Avg. # of Days to collect A/R |
34.22 |
83.52 days
|
better |
| 6) Inventory Turnover (use ending inventory)
|
247.53 |
209.69x
|
worse |
| 7) Avg. # of days to sell Inventory |
1.47 days |
1.74 days
|
Worse |
- TESTS OF SOLVENCY (Measures a company’s ability to pay long-term debt, and its financing structure):
| Solvency Ratios |
2014 |
2013 |
Analysis? |
| 8) Debt to assets ratio |
.82 |
.38
|
Debt increased |
| 9) Debt to equity ratio
|
2.5 |
.61
|
Debt increased |
| 10) Times interest earned (Since we have not calculated a tax expense, use “0”) |
27.4 |
95.98x
|
Coverage lowered which is not healthy |
| 11) Plant assets to long-term liabilities |
0.16 |
2.34
|
Pants worth decreased compared to liabilities |
- TESTS OF PROFITABILITY (Measures a company’s ability to generate earnings):
| Profitability Ratios |
2014 |
2013 |
Analysis? |
| 12) Net (profit) margin |
5% |
17.07%
|
Worse |
| 13) Asset turnover
(Use total assets instead of average)
|
2.7X |
2.38x
|
better |
| 14) Return on investment (“ROI”)
(Use total assets instead of average)
|
38.92 |
40.62%
|
Worse |
| 15) Return on equity
(Use total stockholders’ equity instead of average)
|
73.2% |
65.42%
|
Better |
- TESTS OF THE STOCK MARKET (Measures market performance of a company’s stock):
| Stock Market Ratios |
2014 |
2013 |
Analysis? |
| 16) Earnings per share (BASIC) |
$63.32 |
$63.32
|
No change |
| 17) Book value per share
|
$88.94 |
$96.79 per share
|
Worse |
| 18) Price-Earnings Ratio
(Use an average market price of $37.00 and $32.00 per share for 2014 and 2013, respectively)
|
0.6 |
.50
|
Better |
| 19) Dividend Yield (Use average market price noted in #18.) |
0% |
0%
|
No change |
Based on your results above, answer the following questions:
- Overall, is the company expecting profitability to get better or worse? Explain. Be specific given the profitability ratios you prepared above.
In overall the company is expecting the profitability to be worse. The net profit margin and return on investment is expected to decrease which shows reduction in the ability of the company to generate profit for every dollar of the invested fund and sale. However, the net profit of the company is expected to grow slightly but in overall the profitability is is expected to be worse.
- If you were a banker, would you lend them money based on their forecast? Why? Be specific given the liquidity and solvency ratios you prepared above.
Yes I would lend the money to the company. The company has sufficient liquidity which proves its ability to meet the short term obligation should they fall due. The current ratio of more than 1.2 and a quick ratio of 0.8 is generally considered sufficed indicating that the company has sufficient liquidity.
- If you had the cash to invest in the stock of this corporation would you do so? EXPLAIN WHY? Be specific given the stock market ratios you prepared above. You must state YES you would or NO you wouldn’t and why.
- The company does not offer dividend and the reduction in the book value per share indicates that investing in this share can lead to a capital loos in the market. Although the price earnings ratio is sufficient, investing in shares requires a company that has high future profitability prospects and stable share value.
