Group Assignment: Case Study (30%)

Evaluating Firms Financial Performance

Deadline: 30/04/2021 (Friday)

Lecturer Solehah Binti Yahaya

Course Code & BBC1093 Introduction to Finance

Name
Assignment  Short Case Study
Date of 30 April, 2021
Submission 
Group no. 4
Group Members
Name Student ID

Muntasir Ahmmed (Leader) AIU20092093

Nayama AIU20092072

Wildan Azzam Shalauddin No ID

Gitok Sehandra AIU20092112

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Read carefully the short case study and answer the questions provided below.

Superior Europe, is a medium-sized company, located in the Netherlands, and has

successfully been doing business in the matting industry for 15 years now. Its business
model is based on the sales of commercial- and industrial-floor matting for professional
use, through distributors. Superior Europe manufactures mats and sells them in Europe and
the United States. It developed a strong brand image over time, and its deep knowledge of
the market and strong focus on quality and customization are its advantages. Robert
Lucassen, the managing director of Superior Europe, has been running the company since
its establishment. As the business grew, in 2014, Robert started considering different
opportunities to expand the company’s operations. Such an opportunity came as an offer
for partnership from a leading Chinese manufacturer of products for industrial and
construction safety. This meant that the Chinese partner would complement its product
offering in China with Superior mats. The deal also would ensure that Superior would
increase its offerings to include products for industrial and construction safety, using its
existing distribution channels.
The introduction of new items in Superior’s product portfolio required new expertize
and was perceived as a factor of uncertainty which led to a reduction in the company’s
stock prices, from $38 in 2014 to $34 in 2015. Even though the sales were increasing for
Superior Europe, the profitability was more difficult to maintain. This is because company
was expected to increase its capacities, especially warehouse capacities, and expand its
offerings to products for industrial safety besides mats. Its inventories went up for 44
percent. In order to support the sales of new products to existing clients, more favorable
sales conditions were provided resulting in an increase in account receivables. The
company that traditionally had a policy of strong liquidity started to experience difficulties
in short-term financing.
Robert’s bonuses were paid on the basis of the Economic Value Added (EVA). The
bonus is determined as 1 percent of the firm’s EVA; 70 percent of the bonus is paid in cash
and 30 percent in stocks.
Financial information for Superior Europe for both years has been provided, where all
the numbers, except for per share data, are shown in thousands of dollars. The company’s
estimated cost of capital for all its financing is 12 percent.

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Superior Europe Income Statement (in thousands)

Superior Europe Balance Sheet

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
a. Using what you have learnt in Chapters 2; Understanding Financial Statements
and Cash Flows, and 3; Evaluating a Firm’s Financial Performance, prepare a
financial analysis of Superior Europe and evaluate its financial performance,
comparing the firm’s performance between 2 years.
-Analysis of Balance Sheets-
-Analysis of Income Statements

-Financial Ratios

-Computing Price/earnings and Price/Book ratios

-Computing EVA

ANSWER:

Financial analysis involves study of firm’s liquidity, stability, solvency and profitability.

The financial information for Superior Europe is started for two years. The cost of capital
for the farm is 12%.

(a)

The financial analysis of Superior Europe can be done through some ratios. Those are
current ratio, acid-test ratio, days sales in receivables, days in inventories, operating profit
margin, total asset turnover, operating return on assets, fixed assets turnover, debt ratio,
time interest earned, and return on equity.

Calculate the Net working capital using the formula:

Year 2014:

Net Working Capital= Current assets – current liabilities

= $1725-$650

= 1,075

Therefore, net working capital for the Year 2014 is $1,075

Year 2015:

Net Working Capital= Current assets – current liabilities

= $2,350-$940

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
= $1,410

Therefore, net working capital for the Year 2015 is $1,410

Calculate the current ratio using the formula:

Year 2014:

Current assets
Current ratio =
Current liabilities

$ 1725
=
$ 650

= 2.65

Therefore, current ratio for the Year 2014 is 2.65

Year 2015:

Current assets
Current ratio =
Current liab ilities

$ 2,350
=
$ 940

= 2.5

Therefore, current ratio for the Year 2015 is 2.5

Calculate the acid-test ratio using the formula:

Year 2014:

Cash+ accounts rec eivable

Acid-test ratio =
Current liabilities

$ 300+ $ 700
=
$ 650

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
= 1.54

Therefore, acid-test ratio for the Year 2014 is 1.54

Year 2015:

Cash+ accounts receivable

Acid-test ratio =
Current liabilities

$ 495+ $ 915
=
$ 940

= 1.5

Therefore, acid-test ratio for the Year 2015 is 1.5

Calculate the days in receivables using the formula:

Year 2014:

Account recei vables

Days in receivables= Credit sales
365

$ 700
= $ 5700
365

= 44.82 days

Therefore, days in receivables for the Year 2014 is 44.82 days

Year 2015:

Account receiva bles

Days in receivables= Credit sales
365

$ 915
= $ 5400
365

= 61.87 days

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Therefore, days in receivables for the Year 2015 is 61.87 days

Calculate accounts receivable turnover using the formula:

Year 2014:

annual credit sales

Accounts receivable turnover =
accounts receivable

$ 5700
=
$ 700

= 8.14X

Therefore, the accounts receivable turnover for the Year 2014 is 8.14X

Year 2015:

annual credit sales

Accounts receivable turnover =
accounts receivable

$ 5400
=
$ 915

= 5.90X

Therefore, the accounts receivable turnover for the Year 2015 is 5.90X

Calculate the days in inventories using the formula:

Year 2014:

Inventories
Days in inventories = Annual cost of goods sold
365

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
$ 600
= 3700
$
365

= 59.19 days

Therefore, days in inventories for the Year 2014 is 59.19 days

Year 2015:

Inventories
Days in inventories = Annual cost of goods sold
365

$ 780
= $ 3600
365

= 79.08 days

Therefore, days in inventories for the Year 2015 is 79.08 days

Calculate the inventory turnover using the formula:

Year 2014:

cost of goods sold

Inventory turnover =
Inventory

$ 3700
=
$ 600

= 6.17X

Therefore, the inventory turnover for the Year 2015 is 6.17X

Year 2015:

cost of goods sold

Inventory turnover =
Inventory

$ 3600
=
$ 780

= 4.62X

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Therefore, the inventory turnover for the Year 2015 is 4.62X

Calculate the operating profit margin using the formula:

Year 2014:

Operating profit
Operating profit margin =
sales

$ 840
=
$ 5700

= 0.1474 (or) 14.74%

Therefore, Operating profit margin for the Year 2014 is 14.74%

Year 2015:

Operating profit
Operating profit margin =
sales

$ 520
=
$ 5400

= 0.0963 (or) 9.63%

Therefore, Operating profit margin for the Year 2015 is 9.63%

Calculate the total asset turnover using the formula:

Year 2014:

Sales
Total asset turnover =
Total assets

$ 5700
=
$ 4675

= 1.22X

Therefore, total asset turnover for the Year 2014 is 1.22X

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Year 2015:

Sales
Total asset turnover =
Total assets

$ 5400
=
$ 5100

= 1.06X

Therefore, total asset turnover for the Year 2015 is 1.06X

Calculate the operating return on assets using the formula:

Year 2014:

Operating return on assets= (Operating profit margin*Total asset turnover)

= 14.74% * 1.22= 17.98%

Therefore, Operating return on assets for the Year 2014 is 17.98%

Year 2015:

Operating return on assets= (Operating profit margin*Total asset turnover)

= 9.63% * 1.06 =10.21%

Therefore, Operating return on assets for the Year 2015 is 10.21%

Calculate the fixed assets turnover using the formula:

Year 2014:

Sales
Fixed assets turnover = assets ¿
Net ¿

$ 5700
=
$ 2950

= 1.93X

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Therefore, fixed assets turnover for the Year 2014 is 1.93X

Year 2015:

Sales
Fixed assets turnover = assets ¿
Net ¿

$ 5400
=
$ 2750

= 1.96X

Therefore, fixed assets turnover for the Year 2015 is 1.96X

Calculate the debt ratio using the formula:

Year 2014:

Total debt
Debt ratio =
Total assets

$ 1900
=
$ 4675

= 0.4064(or) 40.64%

Therefore, debt ratio for the Year 2014 is 40.64%

Year 2015:

Total debt
Debt ratio =
Total assets

$ 2265
=
$ 5100

= 0.4441(or) 44.41%

Therefore, debt ratio for the Year 2015 is 44.41%

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)

Calculate the times interest earned using the formula:

Year 2014:

Operating pro fits

Times interest earned =
Interest expenses

$ 840
=
$ 200

= 4.2X

Therefore, Times interest earned for the Year 2014 is 4.2X

Year 2015:

Operating profits
Times interest earned =
Interest expe nses

$ 520
=
$ 275

= 1.89X

Therefore, Times interest earned for the Year 2015 is 1.89X

Calculate return on equity using the formula:

Year 2014:

Net income
Return on equity =
Commonequity

$ 410
=
$ 2775

= 0.1477 (or) 14.77%

Therefore, return on equity for the Year 2014 is 14.77%

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
Year 2015:

Net income
Return on equity =
Commonequity

$ 180
=
$ 2835

= 0.0635 (or) 6.35%

Therefore, return on equity for the Year 2015 is 6.35%

Calculate earnings per share equity using the formula:

Year 2014:

mark et price per share

market price per share
Price/ earnings ratio = = Net income
earnings per share
shares outstanding

$ 36
=
$ 410/150

$ 36
=
2.73

= 13.19X

Therefore, price/ earnings ratio for the Year 2014 is 13.19X

Year 2015: Common stock $1,100

market price per share

market price per share
Price/ earnings ratio = = Net income
earnings per share
shares outstanding

$ 18
=
$ 180 /150

$ 18
=
1.2

= 15X

Therefore, price/ earnings ratio for the Year 2015 is 15X

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)

Calculate Price/Book ratio using the formula:

Year 2014:

market price per share

market price per share
Price/ book ratio = = Shareholders equity
equity book value per share
Number of outstanding shares

$ 36
=
$ 2,775 /150

$ 36
=
18.5

= 1.95X

Therefore, price/ earnings ratio for the Year 2014 is 1.95X

Year 2015: Number of common shares outstanding 150

market price per share

market price per share
Price/ book ratio = = Shareholders equity
equity book value per share
Number of outstanding shares

$ 18
=
$ 2,835 /150

$ 18
=
18.9

= 0.95X

Therefore, price/ earnings ratio for the Year 2015 is 0.95X

Calculate the EVA for year 2014 as follows:

EVA= (Operating return in assets- Cost of capital)*Total assets
= (17.98%-12%)* $4,675
= 5.98%*$4,675
= $279.56

Calculate the EVA for year 2015 as follows:

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
EVA= (Operating return in assets- Cost of capital)*Total assets
= ( 10.21%-12%)* $5,100
= -1.79%*$5,100
= -$91.29

Prepared a table that shows the ratio:

Particulars Company ratio for Year Company ratio for Year

2014 2015
Net Working Capital $1,075 $1,410
Current ratio 2.65 2.50
Acid-test ratio 1.54 1.5
Days in receivables 44.82 days 61.87 days
Accounts receivable 8.14X 5.90X
turnover
Days in inventories 59.19 days 79.08 days
Inventory turnover 6.17X 4.62X
Operating profit margin 14.74% 9.63%
Total asset turnover 1.22X 1.06X
Operating return on assets 17.98% 10.21%
Fixed assets turnover 1.93X 1.96X
Debt ratio 40.64% 44.41%
Times interest earned 4.2X 1.89X
Return on equity 14.77% 6.35%
Price/ earnings ratio 13.19X 15X
Price/ book ratio 1.95X 0.95X
EVA $279.56 -$91.29

b. What conclusions can you make from your analysis?

ANSWER:

Conclusions:

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
 At first, it is evident that the net working capital for both of the year is
satisfactory. Larger the net working capital, better the firm’s ability to repay its
debt. Therefore, it can be concluded that in 2015 the Superior Europe has better
ability to repay its debt than that of 2014.
 The current ratio and acid-test ratio of the company are satisfactory. The current
ratio of the company is 2.5 and the acid-test ratio of the company is 1.5. This
ratio indicates that the company has enough liquidity to meet its expenditure. But
the current ratio and acid-test ratio for year 2015 is less than that of year 2014
which shows that liquidity position of the firm has reduced.
 In 2014, Superior Europe is a bit faster at collecting its receivables than that of
2015, which suggests that its receivables were a little more liquid than in 2015.
However, in 2015 (5.90X) the business collects its accounts receivable slightly
more quickly than that of 2014 (8.14X).
 In 2014, the company takes about 20 days (79.08-59.19) less to sell its
inventories than that of 2015. This suggests that, in 2015 the company’s
inventory is less liquid than that of the previous year. On the other hand,
inventory turnover ratio suggests that, in 2015 the company’s inventory turnover
is much faster than that of 2014.
 The operating profit margin of the company is 9.63% and operating return on
asset is 10.21% in year 2015. The operating profit margin and operating return
has reduced in year 2015 compares to year 2014 that is because of the reduction
in sales in year 2015.
 Total asset turnover ratio indicates assets efficiency of a firm. Here in 2015, the
turnover rate is 1.06X whereas in 2014 it is 1.22X. Therefore, in 2014 the firm is
using its assets more effectively than that of 2015.
 It is known that debt ratio is an indication of “financial risk.” In 2014 the debt
ratio was 40.64%, on the other hand in 2015 it raised to 44.41%. Generally,
higher the ratio, the more risky the firm is, as firms have to pay interest on debt
regardless of the earnings or cash flow situation. Therefore, the Superior Europe
has more financial risk in 2015 than that of in 2014.

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
 Times interest earned ratio measures a firm’s ability to meet its interest payments
using its annual operating earnings. Therefore, it is quite evident that in 2015, the
firm has less capacity to cover its interest expense than that of the previous years.
 The company’s return on equity is 6.35% in year 2015 while in year 2014 it was
14.77%. This shows that reduction in return on equity is due to lower sales in
year 2015.

c. How much will Robert’s bonus be in 2014 and 2015, in the form of both cash and
stock?
ANSWER:

As per the employment term, Robert is entitled to receive 1% of the firm’s Economic
Value Added (EVA) as bonus 70% bonus will be paid in cash and 30% in stocks. EVA is
the measure of computing the company’s economic profit. The EVA of the company for
both the years is:
Calculate the EVA for year 2014 as follows:
EVA= (Operating return in assets- Cost of capital)*Total assets
= (17.98%-12%)* $4,675
= 5.98%*$4,675
= $279.56

Calculate the EVA for year 2015 as follows:

EVA= (Operating return in assets- Cost of capital)*Total assets
= (10.21%-12%)* $5,100
= -1.79%*$5,100
= -$91.29
Particulars 2014 2015
Operating return on assets 17.98% 10.21%
Cost of capital 12% 12%
Total assets $4,675 $5,100
EVA $279.56 -$91.29
Bonus (1% of EVA) $2.7956 Nil, since no bonus is to be
($279.56*1%) paid in case of negative EVA
Cash bonus (70% of bonus) $1.95692

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 Group Assignment: Case Study (30%)
Evaluating Firms Financial Performance
Deadline: 30/04/2021 (Friday)
($2.7956*70%) -

Stock bonus (30% of bonus) $0.83868

($2.7956*30%) -

d. Based on the conclusions of your financial analysis, what recommendations would

you make to management?
ANSWER:

The management should take steps to maintain solvency, stability and increase the
profitability of the firm. The management should do some marketing activities to
increase the sales as the sales decreased from year 2014 to year 2015. So, firm should
concentrate on increasing the sales which will improve the profitability of the firm.

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