D'leon inc., a regional snack-foods producer, was in 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, costs have been higher than were projected, and a large loss occurred in 2002 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

____________, a mercy college finance professional was brought in as assistant to fred campo, d'leon's chairman, who had the task of getting the company back into a sound financial position. D'leon's 2001 and 2002 balance sheets and income statements, together with projections for 2003, are given in tables ic3-1 and ic3-2. In addition, table ic3-3 gives the company's 2001 and 2002 financial ratios, together with industry average data. The 2003 projected financial statement data represent jamison's and campo's best guess for 2003 results, assuming that some new financing is arranged to get the company "over the hump."

Jamison examined monthly data for 2002 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by december. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than 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.

We must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

Note: "e" indicates estimated. The 2003 data are forecasts.

Note: "e" indicates estimated. The 2003 data are forecasts.

Athe firm had sufficient taxable income in 2000 and 2001 to obtain its full tax refund in 2002.

Note: "e" indicates estimated. The 2003 data are forecasts.
ACALCULATION is based on a 365-day year.
A. Why are ratios useful? What are the five major categories of ratios?
B. Calculate d'leon's 2003 current ratio based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2001, 2002, and as projected for 2003? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in this liquidity ratio?
C. Calculate the 2003 inventory turnover, days sales outstanding (dso), fixed assets turnover, and total assets turnover. How does d'leon's utilization of assets stack up against other firms in its industry?
D. Calculate the 2003 debt, times-interest-earned, and ebitda coverage ratios. How does d'leon compare with the industry with respect to financial leverage? What can you conclude from these ratios?
E. Calculate the 2003 profit margin, basic earning power (bep), return on assets (roa), and return on equity (roe). What can you say about these ratios?
F. Calculate the 2003 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?
G. Use the extended du pont equation to provide a summary and overview of d'leon's financial condition as projected for 2003. What are the firm's major strengths and weaknesses?
H. Use the following simplified 2003 balance sheet to show, in general terms, how an improvement in the also would tend to affect the stock price. For example, if 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 "ripple through" the financial statements (shown in thousands below) and influence the stock price?

I. Does it appear that inventories could be adjusted, and, if so, how should that adjustment affect d'leon's profitability and stock price?
J. In 2002, the company paid its suppliers much later than the due dates, and it was not maintaining financial ratios 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 basis of data provided, would you, as a credit manager, continue to sell to d'leon on credit? (you could demand cash on delivery, that is, sell on terms of cod, but that might cause d'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 2003, d'leon showed you its 2003 projections plus proof that it was going to raise over $1.2 million of new equity capital?
K. In hindsight, what should d'leon have done back in 2001?
L. What are some potential problems and limitations of financial ratio analysis?
M. What are some qualitative factors analysts should consider when evaluating a company's likely future financialperformance?

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Table 3-1. Balance sheets 2003e 2002 2001 Assets Cash Accounts receivable Inventories 1.716.480 S 7,282 632,160 715,200 S57,600 351,200 S 85,632 878,000 1.287.360 Total current assets Gross fixed assets Less accumulated depreciatio $2,680,112 $1.926,802 S1.124.000 491,000 146.200 939,790 344.800 1,197,160 1,202,950 380,120 263.160 Net fixed assets Total assets 415 $2866592 S1468 800 $3.497,152 Liabilities and equity Accounts payable Notes payable Accruals S 524,160 636,808 489.600 S 145,600 200,000 136.000 $1,144,800 S1.650,568 481,600 323,432 460,000 203.768 $1,952,352 492 592 S 663.768 Total liabilities and equity S3,497.152 2.866.592 S1.468.800 S 436,800 300,000 408.000 Total current liabilities Long-tem debt Common stock Retained earnings 400.000 1,721,176 231.176 723,432 460,000 32.592 Total equity Table 3-2. Income statements 2003e 2002 2001 Sales Cost of goods sold Other expenses Total operating costs $7,035,600 S6,034,000 S3,432,000 5,875.992 5,528,000 2,864.000 358,672 550,000 519988 Excluding depreciation Ebitda Depreciation Ebit Interest expense Ebt Taxes (40%) Net income S6.425.992 S6,047,988 S3.222672 S 609,608 (S 13,988) S 209,328 18.900 S 492,648 (S 130,948 S 190,428 43 828 S 422,640 (S 266,960) S 146,600 58.640 116.960 70.008 169,056 116.960 136.012 106.784 (S 160 176) S 87960 Eps Dps Book value per share Stock price Shares outstanding Tax rate Lease payments Sinking fund payments $1.014 S0.220 $7.809 $12.17 250.000 40.00% 40.000 (S1.602) S0.110 $4.926 $2.25 100,000 40.00% 40.000 S0.880 S0.220 S6.638 $8.50 100,000 40.00% 40.000 Table 3-3. Ratio analysis Industry 2003e 20022001 average 1.22.3x2.7x 4.7x 4.8x6.1x Current Inventory turnover Days sales outstanding (dso)* Fixed assets turmover Total assets turmover Debt ratio 82.8% 38.2 37.4 32.0 6.4x 10.0x 7.0x 2.1x2.3x2.6x 54.8% 50.0% 1e Ebitda coverage Profit margin -2.1% Basic earning power 1.0x 4.3x 6.2x 0.1x 3.0x8.0x 2.6% 3.5% 4.6% 13.0% 19.1% -5.6% 6.0% 9.1% Roa Koe -32.5% 13.3% 18.2% Pricelearnings -1.4x 9.7x 14.2x -5.2x 8.01.0x 0.5x 1.3x 2.4x Price/cash flow Market/book Book value per share S4.93 S6.64 N. A Accounts receivable 878 Other current assets 1,802 Net fixed assets Total assets debt S 1,545 equity liabilities plus equitv 1952 817 S 3.497 3.497