An equity analyst is evaluating historical financial performance and risk analysis as the first steps to performing a comprehensive valuation assessment for the intrinsic value of the stock for The Toro Company (NYSE: TTC). TTC is a manufacturer and distributor of turf maintenance and irrigation equipment. The analyst has just finished evaluating TTC's long term growth history for over ten years. The compound growth rate of EPS has averaged about 7% per year and DPS compound growth of 8% per year. In fiscal year 2019, there was a significant acquisition that resulted in year over year revenue growth of 30%, but top line revenue growth was slower at about 3% per year for the prior decade. Another acquisition in 2020 has generated additional revenue growth and profitability. As of FY 2020, TTC's top line revenue was nearly $3.4B with net income around $330M. Next steps involve an evaluation of risk from various perspectives from the financial statements and then estimation of TTC's weighted average cost of capital using market data in combination with the background risk analysis from the financial statements. 1. Risk Analysis using Financial Statements Source should be the 2020 SEC 10K report. You will need information from the income statement, balance sheet and statement of cash flows. a. Calculate the following ratios for the past two fiscal years: Liquidity - current ratio & quick ratio Asset Management - inventory turnover, days sales, fixed asset turn., total asset turnover Solvency - total debt, debt to equity, long-term debt, assets to equity, times interest earned Profitability - net profit margin, return on assets, return on equity - Sustainable growth requires RF and retention ratelieb a. 1. Risk Analysis using Financial Statements Source should be the 2020 SEC 10K report. You will need information from the income statement, balance sheet and statement of cash flows. Calculate the following ratios for the past two fiscal years: Liquidity - current ratio & quick ratio Asset Management - inventory turnover, days sales, fixed asset turn., total asset turnover Solvency - total debt, debt to equity, long-term debt, assets to equity, times interest earned Profitability - net profit margin, return on assets, return on equity Sustainable growth - requires ROE and retention rate (i.e. b) Dupont Analysis - put the appropriate ratios together into the DuPont formula and review b. Extract TTC's net sales, cost of goods sold, selling general & administrative expenses, interest expense, taxes, and depreciation for the most recent three years and put into a spreadsheet table. This will make calculations easier for other parts below. Calculate operating cash flow (OCF) for the past three years. d. Assume cost of goods sold is a fair estimate of variable costs and that selling general & administrative expenses fairly estimates fixed operating costs. Calculate the approximate breakeven top line net sales for each year in dollars. e. Using the same VC and FC assumptions, calculate degree of operating leverage (DOL) for each year as either (1 + FC/OCF) or (S - VC)/(S-VC - FC). f. Calculate degree of financial leverage for each year as EBIT/(EBIT - Int.). Note that DOL*DFL is referred to a degree of total leverage. DFL is multiplicative to DOL, thus providing a "magnification factor" to DOL. For example, DFL of 1.3 magnifies operating risk by 30%. g. In a concise one-page or less report, provide an evaluation and opinion on the above analysis for assessment of TTC's financial performance and risk referring to ratio information, breakeven, DOL and DFL measurements. C. An equity analyst is evaluating historical financial performance and risk analysis as the first steps to performing a comprehensive valuation assessment for the intrinsic value of the stock for The Toro Company (NYSE: TTC). TTC is a manufacturer and distributor of turf maintenance and irrigation equipment. The analyst has just finished evaluating TTC's long term growth history for over ten years. The compound growth rate of EPS has averaged about 7% per year and DPS compound growth of 8% per year. In fiscal year 2019, there was a significant acquisition that resulted in year over year revenue growth of 30%, but top line revenue growth was slower at about 3% per year for the prior decade. Another acquisition in 2020 has generated additional revenue growth and profitability. As of FY 2020, TTC's top line revenue was nearly $3.4B with net income around $330M. Next steps involve an evaluation of risk from various perspectives from the financial statements and then estimation of TTC's weighted average cost of capital using market data in combination with the background risk analysis from the financial statements. 1. Risk Analysis using Financial Statements Source should be the 2020 SEC 10K report. You will need information from the income statement, balance sheet and statement of cash flows. a. Calculate the following ratios for the past two fiscal years: Liquidity - current ratio & quick ratio Asset Management - inventory turnover, days sales, fixed asset turn., total asset turnover Solvency - total debt, debt to equity, long-term debt, assets to equity, times interest earned Profitability - net profit margin, return on assets, return on equity - Sustainable growth requires RF and retention ratelieb a. 1. Risk Analysis using Financial Statements Source should be the 2020 SEC 10K report. You will need information from the income statement, balance sheet and statement of cash flows. Calculate the following ratios for the past two fiscal years: Liquidity - current ratio & quick ratio Asset Management - inventory turnover, days sales, fixed asset turn., total asset turnover Solvency - total debt, debt to equity, long-term debt, assets to equity, times interest earned Profitability - net profit margin, return on assets, return on equity Sustainable growth - requires ROE and retention rate (i.e. b) Dupont Analysis - put the appropriate ratios together into the DuPont formula and review b. Extract TTC's net sales, cost of goods sold, selling general & administrative expenses, interest expense, taxes, and depreciation for the most recent three years and put into a spreadsheet table. This will make calculations easier for other parts below. Calculate operating cash flow (OCF) for the past three years. d. Assume cost of goods sold is a fair estimate of variable costs and that selling general & administrative expenses fairly estimates fixed operating costs. Calculate the approximate breakeven top line net sales for each year in dollars. e. Using the same VC and FC assumptions, calculate degree of operating leverage (DOL) for each year as either (1 + FC/OCF) or (S - VC)/(S-VC - FC). f. Calculate degree of financial leverage for each year as EBIT/(EBIT - Int.). Note that DOL*DFL is referred to a degree of total leverage. DFL is multiplicative to DOL, thus providing a "magnification factor" to DOL. For example, DFL of 1.3 magnifies operating risk by 30%. g. In a concise one-page or less report, provide an evaluation and opinion on the above analysis for assessment of TTC's financial performance and risk referring to ratio information, breakeven, DOL and DFL measurements. C