Solved by verified expert :Case
Analysis
A brief outline of the firm and its
industry is given, as well as a few tips for your attention. You are given
three years’ worth of income statements and balance sheets to examine.
You are a financial analyst
working for an investment firm. This manufacturer has asked for your firm’s
help in raising capital for the upcoming season’s production requirements. It
is your job to analyze the financial statements and comment to the investment
brokers on this firm’s current financial situation. It is late July, and the
firm’s financial statements (representing the fiscal year ending June 30) have
just been released.
For this project you must
recreate the attached financial statements on separate worksheets in an Excel
workbook. Then, on another worksheet, you must create formulas to calculate the
financial ratios that can be derived from the given financial statements. These ratios are to be calculated using
formulas in the cells that are linked to the other worksheets: no credit will
be given if the ratios are calculated by hand and entered into the cells.You
must determine which ratios can be calculated with the information given, based
on the ratios given in your textbook. There is enough data for you to calculate
liquidity, asset management, leverage, and profitability ratios. You must calculate the Du Pont ratio
analysis separately. All three years’ worth of ratios must be calculated,
and should be presented in chronological order for you to do trend analysis.
Next, you must write a
one-page paper discussing the findings of your ratio analysis. You must include
not only the current situation, but also how the ratios have changed over the
past three years (trend analysis). Any recommendations you can make as to what
the firm can do to correct any problem areas would make you look better in the
eyes of your superiors.
Sports,
Inc.
Outdoor Sports, Inc. is a manufacturer of
surfboards, wind surfers, and related equipment. The company was started by two
surfers tinkering in their garage with surfboards of their own design. The
company has grown rapidly, cashing in on the increasing popularity of wind
surfing.
Outdoor Sports’ business is
highly cyclical. Inventory is built up during the late fall and winter months,
and the majority of sales are booked and delivered to distributors during the
early spring. Competition among the many manufacturers of this easily made
product line is intense. Small manufacturers like Outdoor Sports are under
great pressure from major sports equipment makers, who have substantial
promotional resources at their disposal, as well as complementary products,
countercyclical to the sale of surfing equipment. Brand recognition is an
important selling point in this competitive business, achieved at considerable
expense through sport personality endorsements and other promotional campaigns.
What to expect from Outdoor
Sports’ financials depends on when they are examined during the fiscal year. At
June 30, the company’s fiscal year-end, the financials should look most
favorable. Receivables, inventory, payables, and working capital borrowings
should be at seasonal lows. The firm should be cash rich, as it is about to
gear up for the next season’s production run. Property, plant and equipment
should be at some significant level commensurate with the company’s
manufacturing demands, supported by equity and long-term debt.
Sales margins bear close
watching. Pricing pressures caused by intense competition can erode them to
dangerously low levels. Given the seasonality of the business, there may be a
cash flow crunch during the winter months. Overall, cash flow may be a problem
if the business is still growing rapidly, and requires outside financial
resources to do so.
The potential of
overproducing during the winter period for a spring sales period that fails to
live up to management’s expectations is also a significant risk.
OUTDOOR SPORTS, INC.
Balance Sheet ($000s)
June 30, 2011
2009
2010
2011
ASSETS
Current
Assets
Cash
182
25
30
Accounts
Receivable
338
391
349
Inventory
283
831
1,207
Prepaid
Expenses
63
33
11
Other
Current Assets
11
8
3
Total
Current Assets
877
1,287
1,601
Propert,
Plant & Equipment
Land,
Buildings & Equipment
842
842
941
Less
Accumulated Depreciation
179
226
286
Net
land, Buildings & Equipment
663
616
655
Total
Assets
$
1,540
$
1,903
$
2,255
LIABILITIES
Accounts
Payable, Trade
129
283
347
Accounts
Payable, Other
80
52
61
Accrued
Expenses
0
0
0
Short-Term
Debt
184
413
745
Income
Tax Payable
61
0
0
Total
Current Liabilities
454
748
1,152
Long-Term
Debt
578
682
869
Total
Liabilities
1,031
1,430
2,021
Stockholders’
Equity
Capital
Stock
275
275
275
Retained
Earnings
234
198
(41)
Total
Stockholders’ Equity
509
473
234
Total
Liabilities and Equity
$
1,540
$
1,903
$
2,255
Outdoor Sports, Inc.
Income
Statement ($000s)
June 30, 2011
2009
2010
2011
Sales
2,519
4,914
6,185
Cost
of Goods Sold
1,460
2,899
4,172
Gross
Income
1,059
2,016
2,013
Operating
Expenses
732
1,898
2,060
Depreciation
Expense
30
47
61
Operating
Income (EBIT)
297
72
(107)
Interest
Expense
72
107
132
Income
Tax Expense
90
0
0
Other
Expense
47
0
0
Net
Income
$
89
$
(36)
$
(239)
