Financial Statement Analysis (40 marks; suggested time 47 Question 7 minutes) Maverick Electronics Ltd. ("Maverick") is a publicly traded company that manufactures and sells state of the art computer chips. You are presented with the following financial information: 2003 2002 350 150 100 150 400 Balance sheets as at December 31: In thousands (000's) 2004 Cash 50 Temporary investments 30 Accounts receivable (net) 550 Inventory 505 Prepaid expenses 75 Current assets $ 1,210 Capital assets & patents (net) 4,473 Total assets $ 5,683 438 130 $ 1,218 2,826 $ 4,044 260 200 120 $ 1,080 1,888 $ 2,968 $ Accounts payable Other current liabilities Current liabilities Bonds payable Total liabilities $ 335 1,010 $ 1,345 1,500 $ 2,845 $ 265 953 $ 1,218 1,000 $ 2.218 206 736 942 $ 500 $ 1,442 200 500 Preferred shares (10% cumulative) Common shares Retained earnings Total shareholders' equity Total liabilities & shareholders' equity 1,000 350 1,488 $ 2.838 $ 5,683 200 450 1,176 $ 1,826 $ 4,044 826 $ 1,526 $ 2,968 Income statements and statements of retained earnings for the year ended December 31: In thousands (000's) 2004 2003 2002 Revenues $ 3,400 $ 2,900 $ 2,600 COGS (2,278) (1,885) (1,664) Gross margin $ 1,122 $ 1,015 $ 936 Bad debts expense (34) (29) (26) Other operating expenses (312) (310) (300) Operating income 776 676 $ 610 Interest expense (90) (30) (60) $ $ $ Income before taxes Income tax expense (40%) Net income 686 (274) 412 616 (246) 370 580 (232) 348 $ $ Add: Opening retained earnings Less: preferred share dividends Closing retained earnings 1,176 (100) 1.488 826 (20) 1,176 498 (20) 826 $ $ $ Additional information: All sales are made on credit with payment due in 40 days. Maverick uses the percentage of sales method to estimate bad debts. All bonds payable have a coupon rate of 6% and are sold at par. The common share price at the end of each year was: O 2004 - $37.02 o 2003 - $35.01 o 2002 - $32.80 The weighted average # of common shares outstanding (in 000's) each year was: 0 2004 - 70 o 2003-90 o 2002 - 100 Required: a. Complete the missing cells in the table below. (10 marks) Note, on the back pages of the question booklet is a template with various ratios. 2004 2003 2002 Current ratio 1.15 0.49 Total liabilities to Total assets 12.3% ROA (Return on assets) 36% Gross (profit) margin % 44 Inventory turnover (in days) days Quick ratio 0.81 24.7% ROE (Return on equity) $ 3.28 EPS (Earnings per share) Interest coverage (or times interest earned) 20.33 times 37 A/R turnover (in days) days b. Pete Mitchell, the CEO of Maverick, was recently quoted in a national business magazine discussing 2004's results: "It has been another phenomenal year for our company. Sales and profits have increased steadily over the last three years and our strategy of expansion is working. This has resulted in higher earnings per share and share price in each year since 2002. This is a wonderful time to be a common shareholder. The future looks bright for our company." Based on your ratios from part (a), agree or disagree with Mr. Mitchell's comments. Separate your discussion into a thoughtful analysis of the company's: liquidity, solvency, and profitability. Your answer should include both relevant ratios and discussion of the insights afforded from these ratios as they relate to the different aspects of your analysis. (25 marks) c. Calculate the Price/Earnings ratio for all three years. What do your results tell you about investors' attitudes and predictions regarding Maverick's future? (5 marks) PV of an Annuity n 1 % 4.0% 5.0% 0.9615 0.9524 1.8861 1.8594 2.7751 2.7232 3.6299 3.5460 4.4518 4.3295 5.2421 5.0757 6.0021 5.7864 6.7327 6.4632 7.4353 7.1078 8.11097.7217 6.0% 0.9434 1.8334 2.6730 3.4651 4.2124 4.9173 5.5824 6.2098 6.8017 7.3601 8.0% 0.9259 1.7833 2.5771 3.3121 3.9927 4.6229 5.2064 5.7466 6.2469 6.7101 10.0% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 12.0% 0.8929 1.6901 2.4018 3.0373 3.6048 4.1114 4.5638 4.9676 5.3282 5.6502 PV of a single dollar (PV $1) n/% 600 VOU AWNS 4.0% 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 5.0% 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 6.0% 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 8.0% 0.9259 0.8573 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632 10.0% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 12.0% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220