Module 1: Case Study
The sales increased by $2.4 million in 2013 over 2012. The net income decreased by $183,096. The assets increased by $1,417,792. Liabilities increased by $1,523,928 and equity decreased by $10,136.
B. What do you conclude from the statement of cash flows?
Based on the statement of cash flows, we trust that there was an increase in current and fixed assets to support the increase in sales. The build up of accounts receivables and inventories resulted in a negative cash flow of $503,936 from operating activities. The fixed assets required $711,850. The requirement for cash was met through sale of short-term investments and an increase in borrowing. The change in cash balance was only -$1,718.
C. What is free cash flow? Why is it important? What are the five uses of FCF?
Free cash flow is cash flow from operating activities - capital expenditure. This is the cash left after meeting the requirements of investments in working capital and fixed assets. This cash is available for distribution to the capital providers of the firm.
FCF is important since the value of a firm is the present value of all free cash flows generated by the firm.
The five uses of Free Cash Flow are:
1. Payment of interest on debt
2. Payment of dividends
3. Repayment of borrowings
4. Repurchase of stock
5. Investment in marketable securities
D. What is Computron's net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have?
Operating current assets are the current assets, which are required for the operations of the firm such as cash, receivables and inventories. These do not include short-term investments since they are not used in the operations of the firm.
Operating current liabilities and spontaneous current liabilities, which support the operations of the firm such as accounts payable and accrued expenses. Short-term borrowing is a form of financing and not operating current liabilities.
Net operating working capital = Operating current assets - operating current liabilities
Operating current assets = $7,282 + $632,160 + $1,287,360 = 1,926,802
Operating current liabilities = $324,000 + $284,960 = 608,960
Net operating working capital = 1,926,802-608,960 = $1,317,842
Total net operating capital = Net operating working capital + net fixed assets
= $1,317,842 + $939,790 = $2,257,632
Net operating working capital = $793,800
And Net operating capital = $1,138,600.
E. What is Computron's free cash flow (FCF)? What are Computron's "net uses" of its FCF?
NOPAT = EBIT X (1-tax rate) = 17,440 X (1-0.4) = $10,464
Free Cash Flow = NOPAT + depreciation - capital expenditure - changes in working capital
Capital expenditure is 711,950
Change in working capital is (793,800-1,317,842) = -524,042
FCF = 10,464 +116,960 - 711,950 - 524,042 = -1,108,568
F. Calculate Computron's return on invested capital. Computron has a cost of capital (WACC). Do you think Computron's growth added value?
Return on invested capital = NOPAT/Net operating Capital
ROIC = 10,464/2,257,632= 0.46%
The growth has not added value, as the ROIC is less than the cost of capital of 10%
G. Cochran also has asked you to estimate Computron's EVA. She estimates that the after-tax cost of capital was in both years.
EVA = NOPAT - Net operating Capital X After tax cost of capital
Net Operating Capital = 2,257,632
EVA = 10,464 - 2,257,632X 10% = $-215,299
EVA =$125,460 - (0.10)($1,138,600)
= $125,460 - $113,860
H. What happened to Computron's Market Value Added (MVA)?
Market Value Added = Market value - Book value.
Market value = 8.50X100,000 = $850,000
Book Value = Shareholders equity = 663,678
MVA =850,000-663,678 = 186,322.
Market value - 6X100,000=600,000
Book Value = Shareholders equity = 557,532.
MVA = 600,000-557,532 42,368.
During the year MVA decreased by $143,954.
I. Assume that a corporation has of taxable income from operations plus of interest income and of dividend income. What is the company's federal tax liability?
The taxable income is:
Income from operation 100,000
Interest income 5,000
Taxable dividend income 3,000
Total taxable income 108,000
Taxable income = $22,250 + ($108,000 - $100,000)0.39 = $25,370.
70% of dividends are excluded from tax
J. Assume that you are in the marginal tax bracket and that you have to invest. You have narrowed your investment choices down to California bonds with a yield of or equally risky ExxonMobil bonds with a yield of. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?
We should choose which ever offers a higher after tax yield.
The California bond is tax exempt and so the after tax yield is 7%.
ExxonMobil - After tax yield = 10% X (1-0.25) = 7.25%
We should choose ExxonMobil
We would be indifferent when the after tax yields are the same.
7% = 10% X (1-tax rate)
Tax rate = 30%
K. Why are ratios useful? What three groups use ratio analysis and for what reasons?
Financial ratios are useful in that they can be used as a means of measuring a firm's performance
against peer companies in their industry and as a means of measuring progress against their own
There are three business groups that use ratio analysis: management, as a means improving their
firm's performance; lenders, as a means of determining a firm's creditworthiness; and stockholders,
as a means of forecasting future earnings and dividend payouts.
L. Calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2012, 2013, and as projected for 2014? We often think of ratios as being useful
a. (1) to managers to help run the business,
b. (2) to bankers for credit analysis, and
c. (3) to stockholders for stock valuation.
Current ratio = current assets / current liabilities
Current ratio = $2,680,112 / $3,516,952 = 2.6
Quick ratio = (current assets - inventory) / current liabilities
Quick ratio = ($2,680,112 - $1,716,480) / $3,516,952 = 0.3
Computron's 2014 current ratio is the highest relative to its 2013 and 2012 current ratios, which
although still below the industry average, is a marked improvement in the company's
performance over its 2013 and 2012 figures.
Conversely, the company's quick ratio for 2014 is the lowest compared to its 2013 and
2012 quick ratios, with the company's quick ratios for all three years being lower than the
industry average. The low 2011 quick ratio serves as an indication that the company might
experience difficulty quickly repaying its debts if the need arose.
M. Would these different types of analysts have an equal interest in the liquidity ratios?
Liquidity ratios, which are used to means to measure how effectively a company can pay off its
short-term obligations would be of great importance to all three types of analysis, as a
company's survivability as an ongoing operation is highly dependent on its ability to satisfy
its debt obligations.
N. Calculate the 2014 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against that of other firms in its industry?
Inventory turnover ratio = sales / inventory
Inventory turnover ratio = $7,035,600 / $1,716,480 = 4.1
DSO = Accounts Receivables / (Sales / 360)
DSO = $878,000 / ($7,035,600 / 360) = 44.9 Days
Fixed assets turnover = Sales / Net fixed assets
Fixed assets turnover = $7,035,600 / $836,840 = 8.4
Total assets turnover = Sales / Total assets
Total assets turnover = $7,035,600 / $3,516,952 = 2.0
Computron's inventory ratio has steadily declined over the past three years, now well below
the industry average. This indicates the company's inability to effectively move its older inventory
items out of stock. The company's days sales outstanding conversely, has steadily increased to a
point well above the industry average, in indication that the company is not very successful in
its collection efforts. Turning over the fixed assets of the company, while improving, is still well
above industry standards, which combined with the company's still below average total assets
turnover ratio, is indicative of the company's ongoing inability to effectively manage its assets.
O. Calculate the 2014 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?
Debt ratio = Total debt / Total assets
Debt ratio = ($1,039,800 + $500,000) / $3,516,952 = 43.8%
TIE = EBIT / Interest expense
TIE = $502,640 / $80,000 = 6.3
EBITDA Coverage = (EBITDA + Lease Payments) / (Interest + Loan Repayments + Lease Payments)
EBITDA Coverage = ($502,640 + $120,000 + $40,000) / ($80,000 + $40,000) = 5.5
Computron's debt and EBITDA coverage ratios for 2014, while forecasted to improve over 2013
results are still below industry standards. This is an indication that the firm while having improved
in its debt management efforts, still has a way to go before it reaches industry standards.
The firm's projected TIE or times-interest-earned ratio is forecasted to place the firm's figure slightly
above industry standards, which means that the firm will effectively be managing the interest
on its debt obligations.
Profit margin = Net income / sales
Profit margin = $253,584 / $7,035,600 = 3.6%
Basic earning power = EBIT / Total assets
Basic earning power = $502,640 / $3,516,952 = 14.3%
ROA = Net income / Total assets
ROA = $253,584 / $3,516,952 = 7.2%
ROE = Net income / Common equity
ROE = $253,584 / $1,977,152 = 12.8%
Computron's forecast for its 2014 profit margin will match industry standards. While its forecasted
results for its basic earning power, ROA, and ROE will having improved, will still result in the firm
being below industry standards for the year. Another indication that the firm has a way to go
before it can be said that it is effectively utilizing its assets to generate higher returns.
Q. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
EPS = Net income / Shares Outstanding
EPS = $253,584 / 250,000 = $1.01
Price / Earnings = Price Per Share / Earnings Per Share
Price / Earnings = $12.17 / $1.01 = 12.0
Cash flow / Share = (Net income + Depreciation expense) / Shares
Cash flow / Share = ($253.584 + $120,000) / 250,000 = $1.49
Price / Cash flow = $12.17 / $1.49 = 8.1
Book value per share = Common equity / Shares outstanding
Book value per share = $1,977,152 / 250,000 =
Market / Book = Market Price Per Share / Book Value Per Share
Market / Book = $12.17 / $7.91 = 1.5
In looking at Computron's price/earnings, price/cash flow, and market/book ratios, it can be
seen that the forecasted 2001 figures will be a substantial improvement over prior year results, with
the company's forecasted price/cash flow ratio exceeding the industry average.
However, the forecasted price/earnings and market/book ratios will still be below industry
standards, another indication that the company will still have to make an improvement on its ability
to generate profit from its available assets.
R. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Computron?
From the common size analysis performed on Computron's balance sheet, it can clearly be seen that
for 2014, that the company plans to increase its total current assets over its 2013 results, while at the
same time reducing its fixed asset base a corresponding amount for the upcoming year. The firm
also plans to reduce its current and long-term debt obligations in 2014, primarily through the issuance
of common stock which is expected to increase from 15.9% of total liabilities and owners' equity in
2010 to 47.8% of total liabilities and owners' equity in 2014.
The company's common size income statement is projecting a reduction in Computron's cost of goods
sold for 2014, which will result in a similar increase in the company's EBIT, EBT and Net income for
the upcoming year.
S. Use the extended DuPont equation to provide a summary and overview of Computron's financial condition as projected for 2014. What are the firm's major strengths and weaknesses?
Du Pont Equation = Profit margin ratio x Total assets turnover x Equity Multiplier
Du Pont Equation = Profit margin ratio x Total assets turnover x (Total Assets / Total Stockholders' Equity)
2014 Du Pont Equation = 3.6% x 2.0 x (3,516,952 / 1,977,152) = 12.8%
2013 Du Pont Equation = -1.6% x 2.0 x (2,886,592 / 557,632) = -16.6%
2012 Du Pont Equation = 2.6% x 2.3 x ( 1,468,800 / 663,768 ) = 13.2%
In viewing the resulting Du Pont equations for the years 2014, 2013 and 2012, it can readily be
seen that the company while experiencing severe problems in utilizing its assets to generate
a profit in 2013, did manage to basically return to its 2012 level of efficiency in 2014, which in
turn increased the financial leverage of the firm to a more respectable level.
Some of Computron's the most notable strengths are its ongoing effort to reduce its debts, which can be
seen in the company's steadily decreasing quick and debt ratios. As the company plans to reduce both
its short and long-term debt in 2014, its quick and debt ratios will ultimately be lower than the industry
standards in the upcoming year.
The company has also been very effective at managing its expenses, bringing expenses from a high of
an 111.8% increase over 2012 results, to an all-time low of 80.3% over 2012 results in 2014. A substantial
savings that will add greatly to the company's 2014 bottom line.
While effective at minimizing its debt, Computron has not been very effective at utilizing its assets,
short term and fixed to generate increased profitability for the firm. The firm's basic earning power
ratio, along with its ROA, and ROE ratios are down in comparison to industry standards, which means
that the company is not as profitable as it could be. The firm's extremely high days sales outstanding,
along with its relatively low total assets turnover ratio, are also indicative of operational inefficiencies,
another operational problem that could be rectified with more effective management.
Rebounding from 2013, a forgettable year in which the company was hit by an 80% increase in its Cost of
Goods Sold, and a staggering 182% increase in Interest Expense, Computron is looking forward to a return
to profitability in 2014. With an estimated 21% increase in Sales Revenue forecasted for 2014, combined
with an anticipated decrease in its Total Operating Costs to 2012 year levels (93% of Sales Revenue),
primarily due to effective management of its assets, Computron expects to generate a Net Income of
$253,584, which would be a vast improvement over the firm's $95,136 Net Income loss in 2013.
f. T. What are some potential problems and limitations of financial ratio analysis?
Financial ratio analysis is a form of financial statement analysis that can be used to obtain a relatively
quick indication of a firm's financial performance in several key areas, making the practice one of the
most powerful tools of financial management.
The limitation of financial statements - Ratios are based only on the information which has been
recorded in financial statements. Financial statements are subject to several limitations. Thus ratios
derived there from, are also subject to those limitations.
Comparative study is required - Ratios are useful in judging the efficiency of a business only when
they are compared with past results of the business. Such a comparison only provides a glimpse
of past performance and forecasts for the future may not prove correct, since several other
factors like market conditions, management policies, etc. may affect future operations
Ratios alone are not adequate - Ratios are only indicators, they cannot be taken as final regarding
good or bad financial position of a business. Other things have also to be seen.
Problems of price level change - A change in price level can affect the validity of ratios
calculated for different time periods. In such a case a ratio analysis may not clearly indicate the
trend in solvency and profitability of a company. The financial statements should therefore be
adjusted, if a meaningful comparison is to be made through accounting ratios.
Lack of adequate standard - No fixed standard can be laid down for ideal ratios. There are no
well accepted standards or rule of thumb for all ratios which can be accepted as norm, making
the interpretation of ratios difficult.
Limited use of single ratios - A single ratio, usually, does not convey much of a sense. To make a
better interpretation, a number of ratios have to be calculated, which is like to confuse an
analyst rather than help him or her to make a god decision.
Personal bias - Ratios are only a means of financial analysis, and not an end in itself. Ratios have
to be interpreted and different people may interpret the same ratio in a different way.
Incomparability - Not only do industries differ in their nature, but also the firms in a similar business
widely differ in their size and accounting procedures, etc., making the comparison of their
respective ratios difficult and/or misleading.
U. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance?
A thorough financial analysis involves much more than just calculating numbers. There are also
qualitative factors that should be considered when attempting to evaluate a company's past, present,
and most importantly - when forecasting future performance
Some of the qualitative factors that an analyst should consider when attempting to evaluate a company's
likely future performance are:
- What does the company do?
- Who are the company's senior officers and management team?
- What is the corporate culture?
- What is the company's corporate governance model?
- What is the company's business model?
- What are the company's goals and/or business objectives?
- To who is the company's revenues tied to?
- How many products are the company's revenue dependent upon?
- What is company's competitive situation?
- Is there a mark for the company products?
- What is the company's legal and/or regulatory environment?
- What does the future hold in for the company and its industry?
- What is the relationship between the company and its suppliers?
- Does the company have overseas operations?
These are but a few factors that should be examined when conducting an evaluation of company's
likely future performance, as each can, and does have an impact on the company's bottom line.
Brigham, Eugene F., and Michael C. Ehrhardt. Financial Management: Theory and Practice. Mason, OH: South-Western, 2014. Print.© BrainMass Inc. brainmass.com October 25, 2018, 9:00 am ad1c9bdddf
Computron - Financial analysis summary
The forecasted profit margin of 3.6%, though expected to match industry standards is lower from an investor's point of view. The return on invested capital is 0.46% which is very low and is not even close to the cost of capital of 10%. The forecasted return on assets, return on equity and basic earning power are lower than the industry standards which indicate that the firm's profitability is not up to the satisfactory level.
Although the current ratio is 2.6 which is above the benchmark of 2.0, the quick ratio of 0.3 is very low indicating poor liquidity. For a ...
The effects the expansions has on salves and net income are determined. The asset side of the balance sheets are given for liabilities and equity.
Joe's Enterprises for Fast Food - Case Study
I need help with a case study on a business plan proposal, attached. I am completely lost. I need the expertise of someone familiar with accounting and financing. The object of this case study is to review the attached business plan and determine if it is a viable business plan why or why not and develop an analysis and a preliminary financial analysis to determine if this firm will provide the necessary capital to the company.
The final part of the Case Study assignment is to write a brief analysis of what Joe's did right and wrong in the development of their business plan and what you would recommend to Joe's management to improve its profitability and competitiveness.
Week 8 Joe's Case Analysis
The Case Study for the Joe's Business Plan is attached to this Assignment. Joe's Enterprises for Fast Food would like to borrow ($1,000,000) one million dollars for three years.
You will be taking the role of an investor or bank lender to determine if your firm would lend Joe's the one million dollars. The attached Word document contains the abbreviated Joe's business plan and financials.
Each student needs to develop their own analysis and a preliminary financial analysis to determine if your firm will provide the necessary capital to the company. In your analysis - explain why you made your decision and what criteria you used to make the decision. Play close attention to business strategies.
The final part of the Case Study assignment is to write a brief analysis of what Joe's did right and wrong in the development of their business plan and what you would recommend to Joe's management to improve its profitability and competitiveness.
Make sure that you include a brief Executive Summary at the beginning of the Case Analysis.
The Page Limit is a maximum of 5 pages. (Spacing and formatting is optional.)
The information contained in the BBC and Joe's Business Plan case studies are copyrighted and cannot be altered. In your case analysis papers you can use the dates given in the plans or revise the dates to the present so that you can use current data for your financial projections and analysis.
Joe's Executive Summary
Joe's Enterprises for Fast Food, Inc. is a small food service company incorporated in 2001 in Illinois that specializes in providing high-quality fast food via company-owned portable carts in high-density urban office locations. The business is operated under the name Joe's Redhots. This plan recommends that the board of directors approve borrowing $1 million from ABC bank to expand marketing and distribution of its current six-cart operation in downtown Chicago. Net profit return on investment in three years is estimated at 243 percent for the $1 million in funding, after pay back.
Joe's Redhots estimates 2005 sales to reach $3 million, with net earnings of $212,500 (7.1 percent of sales). Sales are expected to reach $12 million, with net earnings of $1,280,100 (10.7 percent), by the end of 2008. Joe's has six contracts and options for 24 more contracts with office buildings on Michigan Avenue and other locations in Chicago for indoor/outdoor year-around food service. These high-traffic locations generate an average of $300,000 in annual sales per cart (i.e., 1,000 sales per week @$6.00 average per sale). Joe's has grown to annual sales of $1.8 million in three years with net earnings of $128,900 (7.2 percent), from a single cart in 1997.
Sales Estimates (in $1,000's)
Year 2004 2005 2006 2007 2008
Sales $1,800 $3,000 $6,000 $9,000 $12,000
Cost of Goods 540 900 1,800 2,700 3,600
Gross sales revenues 1,260 2,100 4,200 6,300 8,400
Overhead 860 1,428 2,643 3,844 5,034
Marketing 180 300 600 900 1,200
Earnings before interest and taxes 220 372 957 1,555 2,166
Taxes and interest 91 159 445 663 886
Net $129 $213 $512 $892 $1,280
Business Positioning Strategy
Joe's Redhots sells premium-quality hot dogs and other ready-to-eat luncheon products to upscale business people in high-traffic urban locations. Joe's Redhots is positioned versus other luncheon street vendors as the "best place to have a quick lunch." Reasons why are that Joe's Redhots have the cleanest carts, the most hygienic servers, the purest, freshest, products, and the best values. Prices are at a slight premium to reflect this superior vending service. Joe's Redhots also is known for its fun and promotional personality, offering consumers something special every week for monetary savings and fun.
Each of the carts carries a sign saying "Joe's Redhots?Satisfy yourself for $2.00! You deserve it!" The message is targeted to all passing potential customers who want to indulge themselves inexpensively with a hot dog. There also may be a subliminal message for sinful or forbidden indulgence, too, since most hot dogs are high in fat and unsaturated fats. This unique selling proposition is self-targeting since only consumers who like hot dogs and feel that they deserve an inexpensive indulgence will believe this message is meaningful to them. The benefits of this message are relatively unique: "inexpensive satisfaction plus indulgence." Informal, qualitative research revealed that the target market of busy office workers are constantly in conflict with themselves about wanting a juicy, delicious hot dog and trying to watch the fats and amount of meat in their diets.
Moreover, the hot dogs that Joe's Redhots serves aren't high in fat. They are high quality, all natural products with no preservatives or harmful chemicals. Joe's Redhots vendors make it a point to let customers know that indulging themselves is both inexpensive and healthy. Although the signs emphasize hot dogs, each of Joe's carts offers an extensive menu of healthy and reasonably priced food.
Joe's Redhots was created to attain leadership of mobile, cart serving-units in large urban business centers. Joe's targets upscale, urban office workers seeking fast, convenient, portable, breakfast and lunch meals. Each cart, which costs about $20,000, is capable of housing enough food to serve about 200 to 250 meals per day.
Joe's differentiates and positions its business from the competitive fast food and other take-out restaurants with its products (providing high-nutrition, 100 percent all-natural, no artificial ingredients, colors, additives or preservatives convenience foods and snacks), its concern for the environment (biodegradable, recyclable containers/wrappers and PR tie-ins), and its service (a no-questions-asked money-back guarantee of all products sold and the best-trained company server personnel in the category).
Joe's Redhots food products are priced at parity with, or at a slight premium over, competitive offerings, whether all-natural or not. Extensive promotional activity, including free samples and daily specials, help to ensure that Joe's customers perceive that they are receiving higher quality products and prompt, courteous service in exchange for the slight premium in price.
Joe's Redhots has been successful in establishing contract alliances with real estate management companies for permanent lease sites inside and outside key office buildings, and for cooperative sale of beverages and minor snack items through existing lobby shops. All existing leases permit storage of the vending cart at a secure site within the building in which it operates.
Customer loyalty is encouraged with development and promotion of new and revolving seasonal menu selections each quarter, daily customer sampling, and bonus specials. Training includes "friendly personality" recruiting, a minimum of six hours of company training, mentoring, and apprentice management programs.
Advertising and Promotion
To support its expansion efforts, Joe's Redhots considered using popular media, such as TV, radio, and newspapers to advertise, along with promotional free product samples and coupons. However, informal discussions with suppliers revealed that competitors in the downtown office area were spending little or no money to promote and advertise their cart luncheon business. It appears that the most successful hot dog cart operations spent about 5 percent of net sales revenue for promotion and advertising. Because this business plan anticipates rapid growth through the addition of new carts, Joe's Redhots plans to spend at least 10 percent of net sales during the first year.
Based on this decision, advertising and promotional possibilities were prioritized in order of probable effectiveness, with estimated costs:
TV ($500/30-second ad/station) Free samples ($25/day @$0.25 each)
Radio ($50-100/60-second ad/station) Coupons ($5/day @$.025 each)
Newspaper ads ($500/ad) Frequent purchase book ($15/day)
Cart signage ($100) Soft drink premiums (supplied by drink companies)
Flyers ($100 @$0.10 each)
In performing the research into advertising and promotions, it was determined that any broadcast option involved additional production costs that were at least as much as the cost of running a single ad. In addition, at least four or five ads had to be run per station to be effective. Breakeven cost coverage would be exorbitant, with over a year's estimated sales needed just to pay for a small TV and radio campaign. And it would be difficult to advertise with available media just to the target group of office workers within a radius of six city blocks. All electronic and print media expenses were also well over the 10 percent budget limit.
Based on this analysis, Joe's Redhots decided to have each cart painted ($100) with a clever message, hand out 1,000 flyers ($100) over three months to offices, and do the soft drink premium program (collect can tabs for free gifts provided by local soft drink distributors). Beyond that, efforts would be made to get free PR coverage through local newspapers and downtown TV and radio stations by sending free samples to editorial staff before lunch. Joe's Redhots can afford to hand out flyers and samples all year long and stay within the 10 percent budget limit. If business is better than expected, the extra income will be used to accelerate the purchase of additional carts.
Promotions that will be undertaken to support the business expansion will consist of free samples of prepackaged breakfast and lunch items, bonus days (e.g., free salad days with meal purchase). Other marketing expenditures will be for items such as coupons and frequent buyer card promotions.
These activities will help establish Joe's Redhots as the only fast food operator in the greater Chicago area that gives out free samples continuously throughout the year, and provides a bonus day free side dish program. In the past, this program has been instrumental in growing the business and maintaining loyal customers despite lower price "value meal" promotions with other area fast food restaurants (e.g., McDonald's, Burger King, Kentucky Fried Chicken, White Hen Pantry, etc.).
Market and distribution situation
The company has a unique advantage in the food service market when compared to regular restaurants and other cart vendor operators. Indoor/outdoor location mobility, efficiency in size, significantly lower overhead, pre-packed portion control products, elimination of cooks or chefs, lower cost-of-goods, elimination of cooking and accompanying equipment and elimination of wait/bus staff provide an overall savings in basic cost of goods and services estimated at 50 percent when compared to ordinary restaurants offering similar pricing per meal.
Joe's Redhots is also protected from existing and new competitors via an aggressive space lease contract and option program in key high-traffic office buildings in Chicago. The company is also the only food cart operation with a company-owned mobile cold-storage vehicle to supply company carts as needed. The company is also exploring the possibility of starting its own canteen warehouse to prepare and supply food items, to further lower the cost of goods and expand new menu selections as new cart locations are achieved.
Joe's Redhots has the highest quality of product image for any cart vendor or fast-food operation in the Chicago area, evidenced by numerous media editorials, customer surveys, and the company's own competitive menu surveys of adjacent area competitive food service outlets. The company's products are 100 percent all-natural, with 30 percent of meal items and snacks qualifying as "low fat," at less than four grams fat per serving. Nutritional product information on all products is also available on request from consumers.
Joe's Redhots varies menu items weekly, with three "specials" per day at a discounted price. Seasonal menu variations include more soups, chili, stews, and hot drinks during winter months, and more salads and frozen/cold items (e.g., Italian ices) during summer months.
Joe's Redhots specializes in pre-packaged, all-natural breakfast and lunch sandwiches, salads, soups, and snacks. Low-fat mayonnaise, fresh vegetable toppings and fruits, low-sodium meats, fresh-baked whole-grain breads, and hand-made soups, stews and side dishes provide a unique menu selection for customers. All ingredients are made without artificial colors, additives, or preservatives, another source of product uniqueness when compared to the competition. Joe's Redhots co-ops sales of all-natural beverages from existing office tobacco/candy shops in each building, increasing sales for both businesses.
All Joe's Redhots employees and cart operators are screened for scholastic achievement (i.e., top 30 percent of students) and receive six hours of entry-level customer service training. Cart managers must have a minimum of one year of experience and training with the company.
Joe Hirasawa, company founder and president, graduated from the University of Wisconsin and has several years of food service experience as a chef and restaurant manager, in several of the Chicago area's top restaurants. His family owns a convenience food products company that sells primarily to distributors, and utilizes sales brokers. Joe grew up with work experience in almost every phase of the family business. He has traveled the world extensively, studying food service techniques and food nutrition as practiced by restaurants worldwide. He is fluent in Spanish and Italian, and is an active member of the Food Industry Advisory Board for the Pan-American Restaurant Association. In 2001, he was the recipient of the Entrepreneur-of-the-Year award from the Chicago Restaurant Owners Association.
Company valuation and return on investment (ROI)
Joe's Redhots is committed to increasing shareholder valuation by increasing sales and net profits, along with consideration of sale, merger, joint-ventures and possible issuance of stock in public markets at a future date. Company valuation is estimated conservatively at $7.7 million to $12.8 million (i.e., six to 10 times net earnings) in five years.
Joe's Redhots 5-Year Forecast ( in $1,000's)
YEAR '05 % '06 % '07 % '08 % '09 %
SALES $3,000 100 $6,000 100 $9,000 100 $12,000 100 $15,000 100
Cost of Goods 900 30 1800 30 2700 30 3600 30 4500 30
GROSS MARGIN $2,100 70.0 $4,200 70.0 $6,300 70.0 $8,400 70.0 $10,500 70.0
Ads/Promotion 300 10.0 600 10.0 900 10.0 1200 10.0 1500 10.0
R & D 15 0.5 15 0.3 23 0.3 30 0.3 37 0.3
Dues/Subscriptions 3 0.1 6 0.1 9 0.1 12 0.1 15 0.1
Freight 12 0.4 24 0.4 36 0.4 48 0.4 60 0.4
Insurance 30 1.0 39 0.7 45 0.5 60 0.5 75 0.5
Maintenance 3 0.1 6 0.1 9 0.1 12 0.1 15 0.1
Materials 150 5.0 300 5.0 450 5.0 600 5.0 750 5.0
Miscellaneous 60 2.0 78 1.3 85 1.0 90 0.8 105 0.7
Office Supplies 90 3.0 120 2.0 135 1.5 150 1.3 150 1.0
Outside Services 30 1.0 60 1.0 90 1.0 120 1.0 150 1.0
Accounting/Legal 30 1.0 45 0.8 67 0.8 72 0.6 75 0.5
Lease Equipment 45 1.5 90 1.5 135 1.5 180 1.5 225 1.5
Lease Facilities 45 1.5 90 1.5 135 1.5 180 1.5 225 1.5
Telephone 15 0.5 30 0.5 45 0.5 60 0.5 75 0.5
Travel/Entertainment 15 0.5 30 0.5 45 0.5 60 0.5 75 0.5
Utilities 15 0.5 30 0.5 45 0.5 60 0.5 75 0.5
Sales Commissions 150 5.0 300 5.0 450 5.0 600 5.0 750 5.0
Wages and Salaries 600 20.0 1200 20.0 1800 20.0 2400 20.0 3000 20.0
Total Expenses $1,608 53.6 $3,063 51.1 $4,504 50.1 $5,934 49.5 $7,357 49.1
EBDIT* $492 16.4 $1,137 19.0 $1,796 20.0 $2,466 20.6 $3,143 21.0
Depreciation 120 4.0 180 3.0 240 2.7 300 2.5 360 2.4
EBIT** $372 12.4 $957 16.0 1,556 17.3 $2,166 18.1 $2,783 18.6
Interest Expense 45 1.5 67 1.1 90 1.0 113 0.9 135 0.9
Pretax Earnings $327 10.9 $890 14.8 $1,466 16.3 $2,053 17.1 $2,648 17.7
Income Taxes 114 3.8 378 6.3 573 6.4 773 6.4 975 6.5
Net Income (Loss) $213 7.1 $512 8.5 $893 9.9 $1,280 10.7 $1,673 11.1
*Earnings before depreciation, interest, and taxes
**Earnings before interest and taxes
Balance Sheet as of 6/30/04
Current assets Current liabilities
Cash $5,000 Accounts payable $11,650
Accounts receivable 0 Short-term notes payable 0
Inventory 10,400 Long-term notes payable 7,450
Prepaid expenses 3,600 Current site leases payable 1,200
Temporary investments 0 Sales taxes payable 2500
Total current assets $19,000 Employment taxes payable 2150
Long-term assets Accrued payroll 4,400
real property $185,000 Total current liabilities $29,350
vehicles 38,000 Long-term liabilities
vending carts 120,000 Vending cart loans $32,000
food preparation equipment 24,350 Mobile storage vehicle loan 26,750
food storage equipment 13,500 Mortgage 144,700
furniture and equipment 7,400 Total long-term liabilities $203,450
(less depreciation) (32,875) Total liabilities $232,800
Total long-term assets $355,375 Owner's equity $141,575
Total assets $374,375 Total liabilities & owner's equity $374,375