AFF 210 Chapter Notes - Chapter 3: Value Line, Canadian Business, Food Processor

94 views5 pages

limehorse403

28 Jan 2018

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Quick look the different sections in the statement of cash flow. Calculate and examine the roic and fcf. If the roic is greater than the company"s weighted average cost of capital (wacc), then the company usually is adding value. If the roic is less than the wacc, then the company usually has serious problems. A liquid asset is one that trades in an active market and hence can be quickly converted to cash at the going market price. Inventories are typically the least liquid of a firm"s current assets. Therefore, a measure of the firm"s ability to pay off short-term obligations without relying on the sale of inventories is important. Measures how effectively the firm is managing its assets. If a company has excessive investments in assets, then its operating assets and capital will be unduly high, which will reduce its free cash flow and its stock price.

Related Questions

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2014 (In Thousands)

Cash	$139,080	Accounts payable	$139,080
Receivables	382,470	Other current liabilities	115,900
Inventories	231,800	Notes payable	127,490
Total current assets	$753,350	Total current liabilities	$382,470
		Long-term debt	$266,570
Net fixed assets	405,650	Common equity	509,960
Total assets	$1,159,000	Total liabilities and equity	$1,159,000

Barry Computer Company: Income Statement for Year Ended December 31, 2014 (In Thousands)

Sales		$1,900,000
Cost of goods sold
Materials	$779,000
Labor	418,000
Heat, light, and power	95,000
Indirect labor	190,000
Depreciation	57,000	$1,539,000

Gross profit		$361,000
Selling expenses		228,000
General and administrative expenses		19,000
Earnings before interest and taxes (EBIT)		$114,000
Interest expense		26,657
Earnings before taxes (EBT)		87,343
Federal and state income taxes (40%)		34,937
Net income		$52,406

1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.

Ratio	Barry	Industry Average
Current	x	1.99x
Quick	x	1.35x
Days sales outstanding^a	days	34.99days
Inventory turnover	x	8.44x
Total assets turnover	x	1.91x
Profit margin	%	2.63%
ROA	%	5.02%
ROE	%	10.93%
ROIC	%	7.90%
TIE	x	3.20x
Debt/Total capital	%	47.00%

^aCalculation is based on a 365-day year.

2. Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.

	FIRM	INDUSTRY
Profit margin	%	2.63%
Total assets turnover	x	1.91x
Equity multiplier

3. Outline Barry's strengths and weaknesses as revealed by your analysis. Select One below

a. The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

b. The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

c. The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.

d. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

e. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Select one below

a. If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.

b. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.

c. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.

d. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.

e. If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.

taupehornet862

Staying Alive in Tough Economic Times

Going broke is an idea that any business hates to think about. However, if you are going to go broke in the United States, it helps to be a large, established company. For example, after the September 11, 2001, terrorist attacks, the government stepped in and saved major air carriers like American and United. More recently quasi-government agencies like Fannie Mae and Freddie Mac received money from the government to stay afloat despite poor practices in the mortgage business. Banks that risked capital on risky investments like derivatives and credit swaps were also beneficiaries of the federal governmentâs largesse. Even automakers whose managers misjudged the market were propped up by government dollars. Which leads us to the question, âWhat if small-business owners run out of cash?â

The simple answer is, itâs goodbye to the business. Thatâs why having enough cash on hand (liquidity) is especially critical for entrepreneurs during economic tough times. Unfortunately, this is no simple task. Liquidity for small companies can change almost immediately due to some unexpected event such as a major customer going out of business or perhaps an unexpected natural catastrophe like a flood. Experts agree that keeping enough liquid assets (like cash and cash equivalents like bonds) to fund the next six months is a good rule of thumb. If you keep a reserve of liquid assets, you have time to work on a remedy if a crisis hits rather than having to close your doors.

Accountants and financial managers also advise small businesses to be particularly aware of three ratios to make sure the business is liquid enough to survive: current ratio, quick ratio, and the debt-to-equity ratio.

Current ratio: current assets divided by current liabilities. Most bankers like the ratio to be at least 2:1.

Quick ratio: cash and receivables divided by current liabilities. This ratio addresses the scary question of whether or not a company can meet its obligations if sales suddenly fall or dry up. A ratio greater than 1:1 is often acceptable.

Debt-to-equity ratio: total liabilities divided by shareholders equity. The higher this ratio is the less likely bankers can deal with you. A ratio below 3:1 is often considered safe for small businesses.

Locating corporate annual reports is easier than it has ever been. AnnualReports.com (Links to an external site.)Links to an external site. hosts a website (www.annualreports.com/ (Links to an external site.)Links to an external site.)[i] containing annual reports for hundreds of corporations. The site is comprehensive and easy to use. You can also find publicly traded companies Annual Report on their websites, usually under "Investor Information".

Go to the website (www.annualreports.com/ (Links to an external site.)Links to an external site. ) and choose one company to research. Use the information given in this report to answer the following questions. (Sometimes the Web address for a location changes. You might need to search to find the exact location mentioned.)

1. What is the name of the company?

2. What is the financial year?

3. Calculate the three financial ratios discussed above and listed below and the additional calculations below. Show your work for the ratios. Provide a link to the Annual Report or source you used for the financial information.

a. What is the current ratio?

b. What is the quick ratio?

c. What is the debt-to-equity ratio?

d. On their Balance Sheet, find their Total Assets. What is the total?

e. On their Balance Sheet, find their Total Liabilities. What is the total?

f. On their Income Statement, find their Total Revenues. What is the total?

g. On their Income Statement, find their Total Income. What is the total?

4. Reflect on these calculations. What do they tell you?

Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companyâs liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinkerâs financial condition as projected for 2014. What are the firmâs major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a companyâs likely future financial performance.

AFF 210 Chapter Notes - Chapter 3: Value Line, Canadian Business, Food Processor

Document Summary

Get access

Related Documents

BUS 420 Chapter Notes - Chapter 7: Trend Analysis, Preferred Stock, International Business

MGMT 386 Lecture Notes - Lecture 5: Operating Cash Flow, Debt Ratio, Resource-Based View

BUS-F 355 Lecture Notes - Lecture 4: Reserve Requirement, Office Open Xml, Quick Ratio

Related Questions