Dino's 2014 and 2015 balance sheets and income statements, together with projections for 2016, are given in Tables 1 and 2. In addition, Table 5 gives the company's 2014 and 2015 financial ratios, together with industry average data. 

 

1. Financial analysts sometimes employ a tool known as common size analysis. To form a common size balance sheet, simply divide each asset and liability item by total assets and then express the results as percentages. The resultant percentage statement can be compared with statements of larger or smaller firms, or with those of the same firm over time. To form a common size income statement, divide each income statement item by sales. Please complete the common size analysis in Tables 3 and 4.  What can you say about those ratios?

 

2. Please complete Table 5. What do you observe in the trend and industry average analysis? 

 

3. What is the projected DuPont equation in 2016? 

 

 

 

 

 

Table 1

Balance sheets	2016E	2015	2014
Assets
Cash	85,632	7,282	57,600
Accounts receivable	878,000	632,160	351,200
Inventories	1,716,480	1,287,360	715,200
Total current assets	2,680,112	1,926,802	1,124,000
Gross fixed assets	1,197,160	1,202,950	491,000
Less accumulated depreciation	380,120	263,160	146,200
Net fixed assets	817,040	939,790	344,800
Total assets	3,497,152	2,866,592	1,468,800
Liabilities and Equity
Accounts payable	436,800	524,160	145,600
Notes payable	300,000	636,808	200,000
Accruals	408,000	489,600	136,000
Total current  liabilities	1,144,800	1650,568	481,600
Long-term debt	400,000	723,432	323,432
Common stock	1,721,176	460,000	460,000
Retained earnings	231,176	32,592	203,768
Total equity	1,952,352	492,592	663,768
Total liabilities and equity	3,497,152	2,866,592	1,468,800

Table 2

Income Statements	2016E	2015	2014
Sales	7,035,600	6,034,000	3,432,000
Cost of goods sold	5,875,992	5,528,000	2,864,000
Other expenses	550,000	519,988	358,672
Total operating costs excluding depreciation	6,425,992	6,047,988	3,222,672
EBITDA	609,608	(13,988)	209,328
Depreciation	116,960	116,960	18,900
EBIT	492,648	(130,948)	190,428
Interest expense	70,008	136,012	43,828
EBT	422,640	(266,960)	146,600
Taxes (40%)	169,056	(106,784)a	58,640
Net income	253,584	(160,176)	87,960
Earnings per share	1.014	(1.602)	0.880
Dividend per share	0.220	0.110	0.220
Book value per share	7.809	4.926	6.638
Stock price	12.17	2.25	8.5
Shares outstanding	250,000	100,000	100,000
Tax rate	40.0%	40.0%	40.0%

Note: "E" indicates estimated. The 2016 data are forecasts.

a. The firm has sufficient taxable income in 2013 and 2014 to obtain its full tax refund in 2005. 

 

Table 3

Balance sheets	2016E	2016 Common Size	2015	2015 Common Size
Assets
Cash	85,632	2.45%	7,282	0.25%
Accounts receivable	878,000		632,160
Inventories	1,716,480		1,287,360
Total current assets	2,680,112		1,926,802
Gross fixed assets	1,197,160		1,202,950
Less accumulated depreciation	380,120		263,160
Net fixed assets	817,040		939,790
Total assets	3,497,152	100.00%	2,866,592	100.00%
Liabilities and Equity
Accounts payable	436,800	12.49%	524,160	18.29%
Notes payable	300,000		636,808
Accruals	408,000		489,600
Total current  liabilities	1,144,800		1650,568
Long-term debt	400,000		723,432
Common stock	1,721,176		460,000
Retained earnings	231,176		32,592
Total equity	1,952,352		492,592
Total liabilities and equity	3,497,152	100.00%	2,866,592	100.00%

 

Table 4

Income Statements	2016E	2016 Common Size	2015	2015 Common Size
Sales	7,035,600	100.00%	6,034,000	100.00%
Cost of goods sold	5,875,992		5,528,000
Other expenses	550,000		519,988
Total operating costs excluding depreciation	6,425,992		6,047,988
EBITDA	609,608		(13,988)
Depreciation	116,960		116,960
EBIT	492,648		(130,948)
Interest expense	70,008		136,012
EBT	422,640		(266,960)
Taxes (40%)	169,056		(106,784)a
Net income	253,584	3.60%	(160,176)	-2.65%

 

 

 

 

 

Table 5 Summary of financial ratios

Ratio	Formula	2016E1	2015	2014	Trend Comment3	Industry  average	Industry Comment4
Liquidity
Current	Current assets/current liabilities		1.2	2.3		2.7
Quick	(Current assets-inventories)/ current liabilities		0.4	0.8		1.0
Activity
Inventory turnover	Sales/Inventories		4.7	4.8		6.1
Days sales outstanding (DSO)2	Accounts receivable/  (annual sales/365)		38.2	37.4		32.0
Fixed assets turnover	Sales/net fixed assets		6.4	10.0		7.0
Total assets turnover	Sales/total assets		2.1	2.3		2.6
Debt
Total debt to total assets	Total debt/total assets		82.8%	54.8%		50.0%
Times-interest-earned (TIE)	EBIT/interest charges5		-1.0	4.3		6.2
Profitability
Profit margin on sales	Net income/sales		-2.7%	2.6%		3.5%
Basic earning power	EBIT/total assets		-4.6%	13.0%		19.1%
Return on assets (ROA)	Net income/total assets		-5.6%	6.0%		9.1%
Return on common equity (ROE)	Net income/common equity		-32.5%	13.3%		18.2%
Market
Price/earnings (P/E)	Price per share/earnings per share		-1.4	9.7		14.2
Price/cash flow	Price per share/cash flow per share6		-5.2	8.0		11.0
Market/book (M/B)7	Market price per share/book value per share		0.5	1.3		2.4

Notes:

1. "E" indicates estimated. The 2016 data are forecast.

2. Calculation is based on a 365-day year. Daily sale is equal to annual sales divided by 365 days.

3. Please indicate "better", "worse", or "OK", in the trend comment by comparing 2016E to 2015 and 2014.

4. Please indicate "better", "worse", or "OK" in the industry comment by comparing 2016E to industry average.

5. EBIT means earnings before interest and taxes. 

6. Evaluate and tie the stock price to cash flow, rather than net income. To simplify, the calculation of cash flow is equal to net income plus depreciation divided by common shares outstanding. 

 7. The higher the M/B ratio is, the better it is from the perspective of a firm, rather than an investor. 

 

 

 

Free cash flow 

Based on the following balance sheet and income statements provided, please calculate within the period of 2018.  

1. OCF (Operating Cash flow), assuming a 35.85% tax rate (tax/EBIT=599/1671=0.3585)
2. ΔFA = changes in gross fixed assets
3. ΔCA= changes in current assets
4. ΔA/P= changes in accounts payable
5. Δ accruals = change in accrued liabilities; specifically, accrued expenses
6. FCF (Free Cash Flow)

Hint: FCF = OCF - ΔFA - (ΔCA - ΔA/P - Δ accruals) where OCF = [EBIT×(1 - T) ]+Depreciation 

 

Balance sheets at December 31, 2017 and 2018 ($ in millions) 

Assets	2018	2017	Liabilities and equity	2018	2017
Current assets			Current liabilities
Cash and cash equivalents	440	213	Account payable	1,697	1,304
Marketable securities	35	28	Notes payables	477	587
Accounts receivable	1,619	1,203	Accrued expenses	440	379
Inventories	615	530	Total current liabilities	2,614	2,270
Other	170	176	Long-term liabilities
Total current assets	2,879	2,150	Deferred taxes	907	793
			Long-term debt	1,760	1,474
			Total long-term liabilities	2,667	2,267
			Total liabilities	5,281	4,537
			Stockholders' equity
Fixed assets			Preferred stock	30	30
Gross property, plant and equipment	9,920	9,024	Common stock ($1 per value)	373	342
Less: Accumulated depreciation	3,968	3,335	Paid-in capital in excess of par	248	229
Net property, plant and equipment	5,952	5,689	Retained earnings	4,271	3,670
Intangible assets*	758	471	Less: Treasury stock	614	498
Net fixed assets	6,710	6,160	Total stockholders' equity	4,308	3,773
Total assets	9,589	8,310	Total liabilities and equity	9,589	8,310

*Assume that the change of intangible assets is resulted from the adjustment of their market value, which does not affect cash level. 

 

Income statements for the years ended December 31, 2017, and 2018 ($ in millions) 

	2018	2017
Sales revenue	12,843	9,110
Less: Cost of goods sold	8,519	5,633
Gross profit	4,324	3,477
Less: operating and other expenses	1,544	1,521
Less: Selling, general, and administrative expenses	616	584
Less: Depreciation	633	608
Operating profit	1,531	764
Plus: other income	140	82
Earnings before interest and taxes (EBIT)	1,671	846
Less: interest expense	123	112
Pretax income	1,548	734
Less: Taxes
Current	367	158
Deferred	232	105
Total taxes	599	263
Net income (net profit after tax)	949	471
Less: preferred stock dividends	3	3
Earnings available for common stockholders	946	468
Less: dividends	345	326
Retained earnings	601	142+