ABC is a mid-sized Canadian pharmaceutical company. It was founded in 2010 by Mr. Kyle Dubas and went public in 2014 and is listed on the TSX. From 2014 to 2017 it developed several molecules that are still on patent and that have been selling reasonably well globally.

In 2018, ABC acquired one of its competitors, a private company named KLow Inc. (KLI), who they believed had, and were developing, a complimentary set of molecules. There had been a bidding war with another competitor, Marner Ltd., for the acquisition of KLI.

ABC is still managed by Mr. Dubas, who is the CEO and maintains an aggressive growth strategy. To continue to fuel the growth strategy, Mr. Dubas is seeking additional financing to fund more acquisitions. Believing that he shouldnt go to the debt or public equity markets again, Mr. Dubas has been in contact with various Private Equity firms in Toronto and is seeking to raise more money through a private equity placement.

Attached are the financial statements for ABCs 2019, 2018 and 2017 fiscal years. The Canadian economy has been very stable over the past years, with inflation at 2%.

Required:

You have been hired by a Toronto private equity firm, Masai Capital, as a summer-intern. Masai Capital has just completed a meeting with Mr. Dubas. As your first assignment, your boss, Ms. Bianca Andreescu, one of Masai Capitals Managing Partners, has asked you to review the financial statements of ABC (below) and has asked you to provide her with a memorandum by the end of the week that addresses the following questions:

1. (a) Provide an overview of what Masai Capital should focus its financial analysis and assessment of ABC and identify what aspects of ABCs financial statements should be of primary interest, and (b) Based on the above, calculate the best 3 financial ratios that should be considered by Masai Capital and provide a brief analysis/discussion of such ratios. Please support your answers by fully explaining your rationale.
2. Ms. Andreescu has hired you because she has heard you are a master at being able to tell a story based on the review of financial statements. Provide a summary of what you think has happened with ABC over the last few years from a financial and accounting perspective. What are the clues, from the financial statements, that support your story? Provide full reasoning by referencing the financial statements and/or applicable ratios.

Balance Sheet As at December 31, 2019, 2018 and 2017 (in $ millions) 2018 2017 2019 $ Assets Current Assets Cash Marketable Securities Accounts receivable Inventories Prepaid expenses $ $ 2,060 2,398 2,350 1,350 550 8,708 3,750 4,616 17,074 1,058 2,250 1,235 865 5,408 3,500 12,500 21,408 4,400 2,350 534 224 333 7,841 555 Property, plant and equipment Goodwill and intangible assets Total Assets 8,396 $ Liabilities Current Liabilities Short Term Debt Accounts payable Accrued liabilities Current portion of long-term debt 350 750 1,506 447 1,350 150 3,453 7,550 250 11,253 250 1,350 2.250 125 3,725 235 650 150 1,035 3,754 Long-term debt Unearned revenue Total Liabilities 4,789 Shareholders' Equity Common shares Retained earnings 15,050 (1,701) 13,349 17,074 10,255 (100) 10,155 21,408 4,567 (960 3,607 8,396 Total Liabilities and Shareholders' Equity Statement of Operations As at December 31, 2019, 2018 and 2017 (in S millions) 2018 2017 2019 $ Revenues Cost of sales 6,350 $ 2,150 4,200 10,250 $ 4,350 5.900 3.560 1.250 2.310 Gross Profit 550 2,050 1,050 Selling, general and administrative expenses Research and development expenses Goodwill impairments Amortization expense Operating Income(loss) 1,555 675 7,884 608 (6,522) 450 2,350 235 1,525 Non-recurring loss/(gain) Interest expense Net Income (loss) Before Income Taxes 555 850 (7,927) (335) 1,250 1,435 250 333 1,192 Income tax expense (1,200) 575 345 Net Income (Loss) (6,727) 860 847 Basic Earnings Per Share (8.97) 1.72 3.39 Weighted Average Number of Common Shares (in millions) 750 500 250 Stock Price (end of fiscal year) $ 13.50 $ 15.50 $20.00 Balance Sheet As at December 31, 2019, 2018 and 2017 (in $ millions) 2018 2017 2019 $ Assets Current Assets Cash Marketable Securities Accounts receivable Inventories Prepaid expenses $ $ 2,060 2,398 2,350 1,350 550 8,708 3,750 4,616 17,074 1,058 2,250 1,235 865 5,408 3,500 12,500 21,408 4,400 2,350 534 224 333 7,841 555 Property, plant and equipment Goodwill and intangible assets Total Assets 8,396 $ Liabilities Current Liabilities Short Term Debt Accounts payable Accrued liabilities Current portion of long-term debt 350 750 1,506 447 1,350 150 3,453 7,550 250 11,253 250 1,350 2.250 125 3,725 235 650 150 1,035 3,754 Long-term debt Unearned revenue Total Liabilities 4,789 Shareholders' Equity Common shares Retained earnings 15,050 (1,701) 13,349 17,074 10,255 (100) 10,155 21,408 4,567 (960 3,607 8,396 Total Liabilities and Shareholders' Equity Statement of Operations As at December 31, 2019, 2018 and 2017 (in S millions) 2018 2017 2019 $ Revenues Cost of sales 6,350 $ 2,150 4,200 10,250 $ 4,350 5.900 3.560 1.250 2.310 Gross Profit 550 2,050 1,050 Selling, general and administrative expenses Research and development expenses Goodwill impairments Amortization expense Operating Income(loss) 1,555 675 7,884 608 (6,522) 450 2,350 235 1,525 Non-recurring loss/(gain) Interest expense Net Income (loss) Before Income Taxes 555 850 (7,927) (335) 1,250 1,435 250 333 1,192 Income tax expense (1,200) 575 345 Net Income (Loss) (6,727) 860 847 Basic Earnings Per Share (8.97) 1.72 3.39 Weighted Average Number of Common Shares (in millions) 750 500 250 Stock Price (end of fiscal year) $ 13.50 $ 15.50 $20.00