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Financial Analysis Ratio

Bigger Isnt Always Better!


QUICKFIX INCOME STATEMENT
2000
2001
2002
2003
Net sales
$600,000 $655,000 $780,000
$873,600
COGS
480,000 537,100
655,200
742,560
Gross profit
$120,000 $117,900 $124,800 $131,040
Admin & selling exp
$30,000 $15,345
$16,881
$43,680
Depreciation
25,000
25,000
50,000
50,000
Miscellaneous expenses
2,027
3,557
5,725
17,472
Total operating exp
$57,027 $43,902
$72,606
$111,152
EBIT
$62,973 $73,998
$52,194
$19,888
Interest on ST loans
$15,000 $15,950
$14,000
$13,320
QUICKFIX7,840
BALANCE15,680
SHEET 15,200
Interest on LT loans
8,000
2000
2001
2002
2003
Interest on mortage
12,250
12,110
18,970
18,760
ASSET
Total interest
$35,250 $35,900
$48,650
$47,280
Cash
and
marketable
$155,000
$309,099
$75,948
$28,826
Before-tax earnings
$27,723 $38,098
$3,544
($27,392)
securities
Taxes
11,089
15,239
1,418
-10,957
Account receivable
10,000
12,000
20,000
77,653
Net income
$16,634 $22,859
$2,126
($16,435)
Inventories
250,000
270,000
500,000
520,000
Dividents on stock
0
0
0
0
Current assets
$415,000 $591,099 $595,948 $626,480
Addition to retained
$16,634 $22,859
$2,126
($16,435)
Land,
buildings,
plant,
$250,000
$250,000
$500,000
$500,000
earnings
and equipment
EPS (100,000 shares)
$0.17
$0.23
$0.02
($0.16)
Accumulated
-25,000
-50,000
-100,000 -150,000
depreciation
Net fixed asset
$225,000 $200,000 $400,000 $350,000
TOTAL ASSET
$640,000 $791,099 $995,948 $976,480
LIABILITIES AND
EQUITIES
Short term debt bank
loans
Account payable
Accruals
Current liabilities
Long term debt bank
loans
Mortage
Long-term debt
Total liabilities
Common stock
Retained earnings
Total equity
TOTAL LIABILITIES
AND EQUITY

2004
$1,013,376
861,370
$152,006
$40,535
50,000
15,201
$105,736
$46,271
$13,320
14,640
2004
18,480
$46,440
$18,425
($169)
-68
90,078
($102)
560,000
0
$668,503
($102)
$500,000
$0.00
-200,000
$300,000
$968,503

$50,000

$145,000

$140,000

$148,000

$148,000

10,000
5,000
$65,000
$63,366

10,506
5,100
$160,606
$98,000

19,998
7,331
$167,329
$196,000

15,995
9,301
$173,296
$190,000

16,795
11,626
$176,421
$183,000

175,000
$238,366
$303,366
$320,000
16,634
$336,634
$640,000

173,000
$271,000
$431,606
$320,000
39,493
1
$359,493
$791,099

271,000
$467,000
$634,329
$320,000
41,619
$361,619
$995,948

268,000
$458,000
$631,296
$320,000
25,184
$345,184
$976,480

264,000
$447,000
$623,421
$320,000
25,082
$345,082
$968,503

1. How does Quickfixs average compound growth rate in sales


compare with its earnings growth rate over the past five
years?
Avarage compound growth rate in sales or Compounded Annual
Growth rate in sales (CAGR) is calculated by the formula:
Avarage compound growth rate increased by an average compound
rate of 14% per year over the past five years. But its net income has
declined from over $16,600 in 2000, to negative $102 in 2004 in
comparison.
2. Which statements should Juan refer to and which should he
construct so as to develop a fair assessment of the firms
financial condition? Explain why?
Juan should refer to the income statement and the balance sheet over
the past 3-5 year period. On one hand, he should prepare a cash flow
statement. From that he can easily determines where the cash came
from and where it was spent during a year, how it was spent on the
different activities. On the other hand, He should work out the relative
trends of the various assets, liabilities, revenue sources, and expense
items in balance sheets.

CAGR
3. What calculations should Juan do in order to get a good grasp
of what is going on with Quickfixs performance?

Juan should calculate 5 groups of ratios: Liquidity, Activities, Laverage,


Profitability, Market for at least a three - year period in order to take a
closer look at the factors that has affected the profitability of the
company. In addition, a Du Pont analysis of the return on equity will
help determine why the net income has been negative.
2

4. Juan knows that he should compare Quickfixs condition with


an appropriate benchmark. How should he go about obtaining
the necessary comparison data?
Juan should find industry averages of the key financial ratios. Beside
the industry average, the industry leaders ratios could also be useful.
He can probably get it on the Internet.
5. Besides comparison with the benchmark what other types of
analyses could Juan perform to comprehensively analyze the
firms condition?
Perform the suggested analyses and comment on your
findings.
Besides comparison with the benchmark, Juan could make a common
size Income Statement by dividing each item for the Sales. After that,
some analyses of ratio should be made to sort things out.
QUICKFIX COMMON SIZE INCOME STATEMENT
2000
2001
2002
2003
2004
100.00
100.00
100.00 100.00 100.00
Net sales
%
%
%
%
%
COGS
80.00% 82.00% 84.00% 85.00% 85.00%
Gross profit
20.00% 18.00% 16.00% 15.00% 15.00%
Admin & selling exp
5.00%
2.34%
2.16%
5.00%
4.00%
Depreciation
4.17%
3.82%
6.41%
5.72%
4.93%
Miscellaneous
expenses
0.34%
0.54%
0.73%
2.00%
1.50%
Total operating exp
9.50%
6.70%
9.31%
12.72% 10.43%
EBIT
10.50% 11.30% 6.69%
2.28%
4.57%
Interest on ST loans
2.50%
2.44%
1.79%
1.52%
1.31%
Interest on LT loans
1.33%
1.20%
2.01%
1.74%
1.44%
Interest on mortage
2.04%
1.85%
2.43%
2.15%
1.82%
Total interest
5.88%
5.48%
6.24%
5.41%
4.58%
Before-tax earnings
4.62%
5.82%
0.45%
-3.14% -0.02%
Taxes
1.85%
2.54%SIZE0.24%
-1.83%
QUICKFIX
COMMON
BALANCE
SHEET-0.01%
Net income
2.77%
3.49%
0.27%
-1.88%
-0.01% 2004
2000
2001
2002
2003
ASSET
Cash and marketable securities
24.22%
39.07%
7.63%
2.95%
1.90%
Account receivable
1.56%
1.52%
2.01%
7.95%
9.30%
Inventories
39.06%
34.13%
50.20% 53.25%
57.82%
Current assets
64.84%
74.72%
59.84% 64.16%
69.02%
Land, buildings, plant, and
39.06%
31.60%
50.20% 51.20%
51.63%
3

equipment
Accumulated depreciation
Net fixed asset
TOTAL ASSET
LIABILITIES AND EQUITIES
Short term debt bank loans
Account payable
Accruals
Current liabilities
Long term debt bank loans
Mortage
Long-term debt
Total liabilities
Common stock
Retained earnings
Total equity
TOTAL LIABILITIES AND
EQUITY

-3.91%
35.16%
100.00%

-6.32%
25.28%
100.00%

-10.04% -15.36%
40.16% 35.84%
100.00% 100.00%

-20.65%
30.98%
100.00%

7.81%
1.56%
0.78%
10.16%
9.90%
27.34%
37.24%
47.40%
50.00%
2.60%
52.60%

18.33%
1.33%
0.64%
20.30%
12.39%
21.87%
34.26%
54.56%
40.45%
4.99%
45.44%

14.06%
2.01%
0.74%
16.80%
19.68%
27.21%
46.89%
63.69%
32.13%
4.18%
36.31%

15.28%
1.73%
1.20%
18.22%
18.90%
27.26%
46.15%
64.37%
33.04%
2.59%
35.63%

100.00%

100.00%

100.00% 100.00%

15.16%
1.64%
0.95%
17.75%
19.46%
27.45%
46.90%
64.65%
32.77%
2.58%
35.35%

100.00%

The common size income statement indicates that the firms cost of
goods sold has increased quite a bit since 2000. Miscellaneous
expenses have also increased from 3% of sales to 1.5% of sales. We
can wonder if the expenses has a bad effect on the net income. The
firm needs to look into the costs structure and find out a way to
reduce it.
The common size balance sheet shows that the firms inventory and
accounts receivables levels have gone up sharply, while its cash
balance has significantly declined. Fixed assets have increased over
the past 5 years. The firm has taken on significantly larger amounts of
short and long-term debt relative to its total assets. Equity has not
increased proportionately with debt. As a result its capital structure
has become more leveraged.

DU PONT ANALYSIS
Net Profit Margin
Total Asset Turnover
Equity Multiplier
Return on Assets
Return on Equity
QUICKFIX RATIOS
Current Ratio
Quick Ratio
Cash Ratio
Total Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Times Interest Ratio
Cash Coverage Ratio
Inventory Turnover ratio
Receivables Turnover
ACP or Days' Sales in Receivables
Total Asset Turnover
Profit Margin
ROA
ROE

2000
2.77%
0.94
1.90
2.60%
4.94%

2001
3.49%
0.83
2.20
2.89%
6.36%

2002
0.27%
0.78
2.75
0.21%
0.59%

2003
-1.88%
0.89
2.83
-1.68%
-4.76%

2004
-0.01%
1.05
2.81
-0.01%
-0.03%

6.38
2.54
2.38
0.47
0.90
0.90
1.79
2.50
2.40
60.00
6.08
0.94
2.77%
100.00
%
190.12
%

3.68
2.00
1.92
0.55
1.20
1.20
2.06
2.76
2.43
54.58
6.69
0.83
3.49%
100.00
%
220.06
%

3.56
0.57
0.45
0.64
1.75
1.75
1.07
2.10
1.56
39.00
9.36
0.78
0.27%
100.00
%
275.41
%

3.62
0.61
0.17
0.65
1.83
1.83
0.42
1.48
1.68
11.25
32.44
0.89
-1.88%
100.00
%
282.89
%

3.79
0.62
0.10
0.64
1.81
1.81
1.00
2.07
1.81
11.25
32.44
1.05
-0.01%
100.00
%
280.66
%

Quickfix Autos ROA is currently negative but has improved since 2003.
Most of the decrease has come from the decreasing profit situation.
The firms total asset turnover has improved consistently since 2002.
The firms ROE has dropped significantly since 2001.
This has
occurredbecause of the drop in net profit margin. Because the firm
has such a high equity multiplier due to the high debt.
6. Comment on Quickfixs liquidity, asset utilization, long-term
solvency, and profitability ratios. What arguments would have
to be made to convince the bank that they should grant
Quickfix the loan?
Liquidity:

The firms overall liquidity is quite good with a current ratio of 3.79
and it has improved quite a bit over the past three years. However,
much of its current assets are tied in inventory, since its quick ratio is
only 0.62. The ability of the firm to pay off its current liabilities from
its cash reserves is not very good either and has deteriorated
significantly over the past five years.

Asset utilization:
The firms inventory turnover has declined considerably since 2000.
This occurred due to the increase of inventories over the past 5 years.
The receivables turnover ratio has declined as well. The total asset
turnover is not very high but highest in five years.
Long-term solvency:
Quickfix Autos debt ratio is 64% of total assets. Its debt level has
gone up by almost 17% since 2000. Since the firms coverage ratios
are fairly low, the firms financial structure can be considered to be
quite risky.
Profitability:
The firms profitability ratios have declined significantly in the past
three years. The firm is currently making losses.
Arguments that can be made to get the loan:
If Quickfix wants the bank to grant it the loan, the firm need to
improve liquidity (current ratio) and asset turnover.
7. If you were the commercial loan officer and were approached
by Andre for a short term loan of $25,000, what would your
decision be?
Quickfix's quick ratio has been very weak for the past 5 years. It
indicates the poor cash flow situation. If the firm's performance
become better in the next 2 quaters, I would reconsider.
8. What recommendations should Juan make for improvement, if
any?
The firm needs to improve its inventory management. Further, the
cost of sales and miscellaneous costs should be looked into and

brought down more in line with its level in 2000. This will improve the
liquidity and profitability of the company.
9. What kinds of problems do you think Juan would have to cope
with when doing a comprehensive financial statement analysis
of Quickfix Parts?
What are the limitations of financial
statement analysis in general?
The general problems that we will have to cope with when doing a
comprehensive financial statement analysis are: Selection of comparison
benchmark, The differences
in accounting procedures and depreciation
expenses, Seasonal businesses.
In this situation, whendoing a comprehensive financial statement
analysis of Quickfix Parts, Juan would have to make the right selection of
comparison benchmark.