Andre Pires opened his automobile parts store, Quickfix Auto Parts, five years ago, in a mid-sized city located in the mid-western region of the United States. Having worked for an automobile dealership, first as a technician, and later as the parts department manager, for over 15 years, Andre had learned the many nuances of the fiercely competitive automobile servicing business. He had developed many contacts with dealers and service technicians, which came in really handy when establishing his own retail store. Business had picked up significantly well over the years, and as a result, Andre had more than doubled his store size by the third year of operations. The industry and local forecasts for the next few years were very good and Andre was confident that his sales would keep growing at or above recent levels. However, Andre had used up most of his available funds in expanding the business and was well aware that future growth would have to be funded with external sources of funds. What was worrying Case 2 Bigger Isn't Always Better! Andre was the fact that over the past two years, the store's net income figures had been negative, and his cash flow situation had gotten pretty weak (See Tables 1 and 2). He figured that he had better take a good look at his firm's financial situation and improve it, if possible, before his suppliers found out. He knew fully well that being shut out by suppliers would be disastrous! Andre's knowledge of finance and accounting, not unlike many small businessmen's, was very limited. He had often entertained the thought of taking some financial management courses, but could never find the time. One day, at his weekly bridge session, he happened to mention his problem to Tom Andrews, his long time friend and bridge partner. Tom had often given him good advice in the past and Andre was desperate for a solution. "I'm no finance expert, Andre," said Tom, "but you might want to contact the finance department at our local university's business school and see if you can hire an MBA student as an intern. These students can often be very insightful, you know." That's exactly what Andre did. Within a week he was able to recruit Juan Plexo, a second semester MBA student, who had an undergraduate degree in Accountancy and was interested in concentrating in Finance. When Juan started his internship, Andre explained exactly what his concerns were. "I'm going to have to raise funds for future growth, and given my recent profit situation, the prospects look pretty bleak. I can't seem to put my finger on the exact cause. The bank's commercial loan committee is going to want some pretty convincing arguments as to why they should grant me the loan. I need to put some concrete remedial measures in place, and was hoping that you can help sort things out, Juan," said Andre. "I think I may have bitten off more than I can currently chew." Quickfix Autoparts Balance Sheets ASSETS 2000 2001 2002 2003 2004 Cash and marketable securities Accounts receivable $155,000 10,000 $309,099 12,000 $75,948 20,000 $28,826 77,653 $18,425 90,078 inventory 250,000 270,000 500,000 520,000 560,000 Current assets $415,000 $591,099 $595,948 $626,480 $668,503 Land, buildings, plant, and equipment $250,000 $250,000 $500,000 $500,000 $500,000 Accumulated depreciation (25,000) (50,000) (100,000) (150,000) (200,000) Net fixed assets $225,000 $200,000 $400,000 $350,000 $300,000 Total assets $640,000 $791,099 $995,948 $976,480 $968,503 LIABILITIES AND EQUITIES $140,000 $148,000 15,995 Short-term bank loans $148,000 $50,000 10,000 $145,000 Accounts payable 10,506 19,998 16,795 Accruals 5,000 5,100 7,331 9,301 11,626 Current liabilities $65,000 $160,606 $167,329 $173,296 $176,421 Long-term bank loans $63,366 $98,000 $196,000 $190,000 $183,000 Mortgage 175,000 173,000 271,000 268,000 264,000 Long-term debt $238,366 $271,000 $467,000 $458,000 $447,000 Total liabilities $303,366 $431,606 $634,329 $631,296 $623,421 Common stock (100,000 shares) $320,000 $320,000 $320,000 $320,000 $320,000 25,082 Retained earnings 16.634 39.493 41,619 25,184 Total equity $336,634 $359,493 $361,619 $345,184 $345.082 Total liabilities and equity S640.000 $791,099 $995,948 $976.480 $968,503 Table 2 Quickfix Autoparts Income Statements 2000 2001 2002 2003 2004 Net sales S600,000 $655,000 $780,000 $873,600 $1,013,376 Cost of goods sold 480,000 537,100 655,200 742,560 861,370 Gross profit $120,000 $117,900 $124,800 $131,040 $152,006 Admin and selling exp $30,000 $15,345 $16,881 $43,680 $40,535 Depreciation 25,000 25,000 50,000 50,000 50,000 Miscellaneous expenses 2,027 3,557 17,472 5,725 15,201 Total operating exp $57,027 $43,902 $72,606 $111,152 $105,736 EBIT $62,973 $73,998 $52,194 $46,271 $19,888 Interest on ST loans $15.000 $15,950 $14,000 $13,320 $13,320 Interest on LT loans 8,000 7,840 15.680 15,200 14,640 Interest on mortgage 12,250 12,110 18,970 18,760 18,480 Total interest $35,250 $35,900 $48,650 $47,280 $46,440 Before-tax earnings $27,723 $38,098 $3,544 ($27,392) (S169) Taxes 11,089 15,239 1,418 (10,957) (68) Net income $16,634 $22,859 $2,126 ($16,435) ($102) Dividends on stock Addition to retained eamings $16,634 $22,859 $2,126 ($16,435) ($102) EPS (100,000 shares) $0.17 $0.23 (50, 16) (S0.00) $0.02 Questions: 1. How does Quickfix's average compound growth rate in sales compare with its earnings growth rate over the past five years? 2. Which statements should Juan refer to and which ones should he construct so as to develop a fair assessment of the firm's financial condition? Explain why? 3. What calculations should Juan do in order to get a good grasp of nat is going on with Quickfix's performance? 4. Juan knows that he should compare Quickfix's condition with an appropriate benchmark. How should he go about obtaining the necessary comparison data? 5. Besides comparison with the benchmark what other types of analyses could Juan perform to comprehensively analyze the firm's condition? Perform the suggested analyses and comment on your findings. 6. Comment on Quickfix's 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? 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? Why? 8. What recommendations should Juan make for improvement, if any? What kinds of problems do you think Juan would have to cope with when conducting a comprehensive financial statement analysis of Quickfix Auto Parts? What are the limitations of financial statement analysis in general?