Comprehensive Problem The Protek Company is a large manufacturer and distributor of electronic components Because of some successful new products marketed to manufacturers of computers and mobile electronic devises, the firm has recently undergone a period of explosive growth, more than doubling its revenues during the last two years However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the companys stock price You are a financial consultant who has been retained to analyze the companys performance and find out whats going wrong Your investigative plan involves conducting a series of in depth interviews with management and doing some independent research on the industry However, before starting, you want to focus your thinking to be sure you can ask the right questions Youll begin by analyzing the firms financial statements over the last three years, which are shown below The following additional information is provided with the financial statements Depreciation for 20X1, 20X2, and 20X3 was $200, $250, and $275 million, respectively No stock was sold or repurchased, and, like many fast growing companies, Protek paid no dividends Assume the tax rate is a flat 34 , and the firm pays 10 interest on its debt a Construct common size income statements for 20X1, 20X2, and 20X3 Analyze the trend in each line What appears to be happening (Hints Think in terms of both dollars and percentages As the company grows, the absolute dollars of cost and expense spending go up What does it mean if the percentage of revenue represented by the expenditure increases as well How much of an increase in spending do you think a department could manage efficiently Could pricing of Proteks products have any effect ) 20X1 20X2 20X3 Sales $ 1,524 100 00 $ 2,090 100 00 $ 3,231 100 00 COGS 631 41 40 906 43 35 1,502 46 49 Gross Margin $ 893 58 60 $ 1,184 56 65 $ 1,729 53 51 Expenses 0 00 0 00 0 00 Marketing $ 316 20 73 $ 495 23 68 $ 882 27 30 R D 158 10 37 211 10 10 327 10 12 Admin 126 8 27 179 8 56 294 9 10 Total Expenses $ 600 39 37 $ 885 42 34 $ 1,503 46 52 EBIT $ 293 19 23 $ 299 14 31 $ 226 6 99 Interest 63 4 13 95 4 55 143 4 43 EBT $ 230 15 09 $ 204 9 76 $ 83 2 57 Tax 78 5 12 69 3 30 28 0 87 EAT $ 152 9 97 $ 135 6 46 $ 55 1 70 b Construct statements of cash flows for 20X2 and 20X3 Where is the companys money going to and coming from Make a comment about its free cash flows during the period Is it likely to have positive or negative free cash flows in the future c) Calculate the indicated ratios below for all three years Analyze trends in each ratio and compare each with the industry average What can you infer from this information Make specific statements about liquidity, asset management, especially receivables and inventories, debt management, and profitability Do not simply say that ratios are higher or lower than the average or that they are going up or down Think about what might be going on in the company and propose reasons why the ratios are acting as they are Use only ending balance sheet figures to calculate your ratios Do certain specific problems tend to affect more than one ratio Which ones 20x3 $3,265 1,502 $ 1,763 Protek Company Income Statements For the periods ended 12 31 (5000,000) 20x1 20x2 Sales $1,578 $2,106 COGS 631 906 Gross margin $ 947 $1,200 Protek Company Income Statements For the periods ended 12 31 ($000,000) Expenses Marketing $ 316 $495 R D 158 211 Administration 126 Total expenses $600 $885 EBIT $ 347 $ 315 Interest 63 95 EBT $ 284 $220 Tax 97 75 Net income $ 187 $ 145 179 $ 882 327 294 $1,503 $ 260 143 $ 117 40 $ 77 20X3 $ 62 590 300 $ 952 Protek Company Balance Sheets For the periods ended 12 31 ($000,000) ASSETS 20x1 20x2 Cash $ 30 $ 40 Accounts receivable 175 351 Inventory 90 151 CURRENT ASSETS $ 295 $542 Fixed assets Gross $1,565 $2,373 Accumulated depreciation (610) (860) Net $ 955 $1,513 TOTAL ASSETS $1,250 $2,055 LIABILITIES 20x1 20X2 Accounts payable $ 56 $ 81 Accruals 15 20 CURRENT LIABILITIES $ 101 Capital Long term debt $ 630 $1,260 Equity 549 694 TOTAL LIABILITIES EQUITY $1,250 $2,055 $ 2,718 (1,135) $1,583 $2,535 20X3 $ 134 30 $ 164 $ 71 $1,600 771 $2,535 20x1 20x2 20X3 Current ratio Quick ratio ACP Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Debt equity TIE ROS ROA ROE Equity multiplier Industry Average 4 5 3 2 42 days 7 5 1 6X 1 2x 53 1 1 4 5 9 0 10 8 22 8 2 1

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Comprehensive Problem. The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of computers

Comprehensive Problem. The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of computers and mobile electronic devises, the firm has recently undergone a period of explosive growth, more than doubling its revenues during the last two years. However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the companys stock price. You are a financial consultant who has been retained to analyze the companys performance and find out whats going wrong. Your investigative plan involves conducting a series of in-depth interviews with management and doing some independent research on the industry. However, before starting, you want to focus your thinking to be sure you can ask the right questions. Youll begin by analyzing the firms financial statements over the last three years, which are shown below. The following additional information is provided with the financial statements. Depreciation for 20X1, 20X2, and 20X3 was $200, $250, and $275 million, respectively. No stock was sold or repurchased, and, like many fast-growing companies, Protek paid no dividends. Assume the tax rate is a flat 34%, and the firm pays 10% interest on its debt.

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a. Construct common size income statements for 20X1, 20X2, and 20X3. Analyze the trend in each line. What appears to be happening? (Hints: Think in terms of both dollars and percentages. As the company grows, the absolute dollars of cost and expense spending go up. What does it mean if the percentage of revenue represented by the expenditure increases as well? How much of an increase in spending do you think a department could manage efficiently? Could pricing of Proteks products have any effect?)

	20X1	%	20X2	%	20X3	%
Sales	$ 1,524	100.00%	$ 2,090	100.00%	$ 3,231	100.00%
COGS	631	41.40%	906	43.35%	1,502	46.49%
Gross Margin	$ 893	58.60%	$ 1,184	56.65%	$ 1,729	53.51%
Expenses		0.00%		0.00%		0.00%
Marketing	$ 316	20.73%	$ 495	23.68%	$ 882	27.30%
R & D	158	10.37%	211	10.10%	327	10.12%
Admin.	126	8.27%	179	8.56%	294	9.10%
Total Expenses	$ 600	39.37%	$ 885	42.34%	$ 1,503	46.52%
EBIT	$ 293	19.23%	$ 299	14.31%	$ 226	6.99%
Interest	63	4.13%	95	4.55%	143	4.43%
EBT	$ 230	15.09%	$ 204	9.76%	$ 83	2.57%
Tax	78	5.12%	69	3.30%	28	0.87%
EAT	$ 152	9.97%	$ 135	6.46%	$ 55	1.70%

b. Construct statements of cash flows for 20X2 and 20X3. Where is the companys money going to and coming from? Make a comment about its free cash flows during the period. Is it likely to have positive or negative free cash flows in the future?

c) Calculate the indicated ratios below for all three years. Analyze trends in each ratio and compare each with the industry average. What can you infer from this information? Make specific statements about liquidity, asset management, especially receivables and inventories, debt management, and profitability. Do not simply say that ratios are higher or lower than the average or that they are going up or down. Think about what might be going on in the company and propose reasons why the ratios are acting as they are. Use only ending balance sheet figures to calculate your ratios. Do certain specific problems tend to affect more than one ratio? Which ones?

20x3 $3,265 1,502 $ 1,763 Protek Company Income Statements For the periods ended 12/31 (5000,000) 20x1 20x2 Sales $1,578 $2,106 COGS 631 906 Gross margin $ 947 $1,200 Protek Company Income Statements For the periods ended 12/31 ($000,000) Expenses Marketing $ 316 $495 R&D 158 211 Administration 126 Total expenses $600 $885 EBIT $ 347 $ 315 Interest 63 95 EBT $ 284 $220 Tax 97 75 Net income $ 187 $ 145 179 $ 882 327 294 $1,503 $ 260 143 $ 117 40 $ 77 20X3 $ 62 590 300 $ 952 Protek Company Balance Sheets For the periods ended 12/31 ($000,000) ASSETS 20x1 20x2 Cash $ 30 $ 40 Accounts receivable 175 351 Inventory 90 151 CURRENT ASSETS $ 295 $542 Fixed assets Gross $1,565 $2,373 Accumulated depreciation (610) (860) Net $ 955 $1,513 TOTAL ASSETS $1,250 $2,055 LIABILITIES 20x1 20X2 Accounts payable $ 56 $ 81 Accruals 15 20 CURRENT LIABILITIES $ 101 Capital Long-term debt $ 630 $1,260 Equity 549 694 TOTAL LIABILITIES & EQUITY $1,250 $2,055 $ 2,718 (1,135) $1,583 $2,535 20X3 $ 134 30 $ 164 $ 71 $1,600 771 $2,535 20x1 20x2 20X3 Current ratio Quick ratio ACP Inventory turnover Fixed asset turnover Total asset turnover Debt ratio Debt: equity TIE ROS ROA ROE Equity multiplier Industry Average 4.5 3.2 42 days 7.5% 1.6X 1.2x 53% 1:1 4.5 9.0% 10.8% 22.8% 2.1