Share
Explore BrainMass

Integrated Case: Financial Statement Analysis:

Integrated Case: Financial Statement Analysis:

Discuss the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, cost have been higher than were projected, and a large loss occurred in 2008 rather than the expected profit. As a result, it's managers, directors, and investors are concerned about the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, D'Leon's Chairman, who had the task of getting the company back in a sound financial position. D'Leon's 2007 and 2008 balance sheets and income statements, together with projections for 2009, are giving in the Tables IC 4-1 and IC 4-2. In addition, Table IC 4-3 gives the company's 2007 and 2008 financial ratios, together with the industry average data. The 2009 projected financial statement data represent Jamison's and Campo's best guess for 2009 results, assuming that some new financing is arranged to get the company "over the hump". Jamison examined monthly data for 2008 ( not given in this case), and she detected an improving pattern during the year. Monthly sales were rising, cost were falling, and large losses in the early months and turned to a small profits by December. Thus, the annual data looks somewhat worse that final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending sales, and deriving benefits were longer that D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company- provided it can survive in the short run. Jamison must prepare an analysis of where the company is now, and what it must do to regain its financial health, and what action should be taken. Your assignment is to help her answer the following questions, provide clear explanations, not yes or no answer. a. Why are ratio useful? What are the five major categories of ratio? b. Calculate Dâ??Leonâ??s 2009 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 2007, in 2008, and and as projected for 2009? We often think of ratio as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratio? c. Calculate the 2009 inventory turnover, data sales outstanding (DOS), fixed assets turnover, and total assets turnover. How does D'Leon's utilization of assets stack up against the other firms in the industry? d. Calculate 2009 debt and times-interest-earned ratios. How does D'Leon compare with the industry with respect to financial leverage? What can you conclude from these ratios? e. Calculated 2009 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios? f. Calculated 2009 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? g. Use the DuPont equation to provide a summary and overview of D'Leon's financial condition as projected for 2009. What are the firm's major strengths and weaknesses? h. Use the following simplified 2009 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, the the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change â??ripple throughâ? the financial statement (shown in thousands below) and influence the stock price? Accounts receivable $878 &n bsp; debt $1,545 Other current assets &n bsp; 1,802 Net Fixed assets 817 & nbsp;Equity 1,952 Total assets $3,497 Liabilities plus equity $3,497 i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D'Leon's profitability and stock price? j. In 2008, the company paid its suppliers much larger than the due dates; also, it was not maintaining financial ratio at levels called for in its bank loan agreements. Therefore, suppliers could cut the company off, and its bank could refuse to renew the loan when it comes due in 90 days. On the basic data provided, would you, as a credit manager, continue to sell to Dâ??Leon on credit? ( you could demand cash on delivery--that is sell on terms of COD----but that might cause Dâ??Leon to stop buying from your company.) similarly, if you were the bank loan officer, would you recommend renewing the loan or demand its repayment? Would your actions be influenced if in early 2009 D'Leon showed you its 2009 projections along with proof that it was going to raise more than $1.2 million of new equity? k. In hindsight, what should Dâ??Leon have done in 2007? l. What are some potential problems and limitations of financial ratio analysis? m. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance? Table IC 4-1 Balance Sheets &nbs p; 2009E 2008 2007 Assets Cash &n bsp; $ 85,632 $ 7,282 $ 57,600 Accounts receivable &n bsp; 878,000 632,160 351,200 Inventories &nbs p; 1,716,480 1,287,360 715,200 Total current assets $2,680,112 &n bsp; 1,926,802 1,124,000 Gross fixed assets &nbs p; 1,197,160 1,202,950 491,000 Less accumulated depreciation 380,120 & nbsp; 263,160 146,200 Net fixed assets &nbs p; $817,040 $939,790 $344,800 Total assets &n bsp; $3,497,152 $2,866,592 $1,468,800 Liabilities and Equity Account payable &nb sp; $436,800 $524,160 $145,600 Notes payable &nb sp; 300,000 636,808 200,000 Accruals &nbs p; 408,000 489,600 136,000 Total current liabilities & nbsp; $1,144,800 $1,650,568 $481,600 Long-term debt &nbs p; 400,000 723,432 323,432 Common stock & nbsp; 1,721,176 460,000 460,000 Retained earnings 231,176&n bsp; 32,592 203,768 Total equity &nbs p; $1,952,352 $ 492,592 $663,768 Total liabilities and equity ; $3,497,152 $2,866,592 $1,468,800 Note: E indicates estimated. The 2009 data are forecasts. Table IC 4-2 Income Statement &nbs p; 2009E 2008 2007 Sales &nb sp; $7,035,600 $6,034,000 $3,432,000 Cost of goods sold &n bsp; 5,875,992 5,528,000 2,864,000 Other expenses &nbs p; 550,000 519,988 358,672 Total operating costs excluding Depreciation & amortization $6,425,992 $6,047,988 $3,222,672 EBITDA &nb sp; $609,608 ($13,988) $209,328 Depreciation & amortization $116,960 $116,960 $18,900 EBIT &nb sp; $492,648 ($130,948) $190,428 Interest expense &n bsp; 70,008 &nb sp; 136,012 43,828 EBT &n bsp; $422,640 ($266,960) $43,828 Taxed (40%) & nbsp; $169,056 (106,784)a 58,640 Net income ; $253,584 ($160,176) $87,960 EPS &nb sp; $1.014 ($1.602 $0.880 DPS &nbs p; $0.220 $0.110 $0.220 Book value per share &n bsp; $7.809 $4.926 $6.638 Stock price &nbs p; $12.17 & nbsp; $2.25 $8.50 Share outstanding &nbs p; 250,000 100,000 100,000 Tax rate &nb sp; 40.00% 40.00% 40.00% Lease payment &n bsp; $40,000 $40,000 $40,000 Sinking fund payments &nb sp; 0 0 0 Note: E indicates estimated. The 2009 data are forecasts. aâ?¦The firm had sufficient taxable income in 2006 and 2007 to obtain its full tax refund in 2008. Table IC 4-3 Ratio Analysis &nbs p; 2009E 2008 2007 Industry Average Currents ; 1.2x 2.3x 2.7x Quick &nbs p; 0.4x 0.8x 1.0x Inventory turnover &nb sp; 4.7x 4.8x 6.1x Days sale outstanding (DSO) & nbsp; 38.2 37.4 32.0 Fixed assets turnover &nbs p; 6.4x 10.0x 7.0x Total assets turnover &nbs p; 2.1x 2.3x 2.6x Debt ratio 82.8% 54.8% 50.0% & nbsp; TIE -1.0x 4.3x 6.2x Operating margin &nb sp; -2.2% 5.6% 7.3% Profit margin &nb sp; -2.7% 2.6% 3.5% Basic earnings power -4.6% 13.0% 19.1% ROA &nbs p; -5.6% 6.0% 9.1% ROE &nbs p; -32.5% 13.3% 18.2% Price/earnings &nb sp; -1.4x 9.7x 14.2x Market/book &nbs p; 0.5x 1.3x 2.4x Book value per share &nb sp; $4.93 $6.64 n.a.

Attachments

Solution Preview

Integrated Case: Financial Statement Analysis:

Discuss the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, cost have been ...

Solution Summary

Integrated Case: Financial Statement Analysis:

Discuss the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, cost have been higher than were projected, and a large loss occurred in 2008 rather than the expected profit. As a result, it's managers, directors, and investors are concerned about the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, D'Leon's Chairman, who had the task of getting the company back in a sound financial position. D'Leon's 2007 and 2008 balance sheets and income statements, together with projections for 2009, are giving in the Tables IC 4-1 and IC 4-2. In addition, Table IC 4-3 gives the company's 2007 and 2008 financial ratios, together with the industry average data. The 2009 projected financial statement data represent Jamison's and Campo's best guess for 2009 results, assuming that some new financing is arranged to get the company "over the hump". Jamison examined monthly data for 2008 ( not given in this case), and she detected an improving pattern during the year.

$2.19