FINANCIAL STATEMENTS ANALYSIS HORORATA INC

A large loss occurred in 2019 at Hororata Inc in Canterbury, rather than the expected profit. As a result, its stakeholders are concerned about the firms performance.

You are hired as the new Chief Financial Officer and are given the task of getting the company back into a sound financial position. Hororatas 2018 and 2019 balance sheets and income statements, together with projections for 2020, are shown in the following tables. The tables also show the 2018 and 2019 financial ratios, along with industry average data. The 2020 projected financial statement data represent the best projection for 2020 results, assuming that some new financing is arranged to get the company over the hump and back on track.

You are given the responsibility to prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.

Table 1 - Hororata Inc. Balance Sheets

Assets 2018 ($000). 2019 ($000). 2020e ($000)

Cash7,5007,300-14,000

Short-Term Investments-46,60018,50070,000

Accounts Receivable3 50,000650,000-870,000

Inventories-713,000--1,283,860----1,810,080

Total Current Assets1,117,100--1,959,660----2,764,080

Gross Fixed Assets-490,5001,201,350-1,218,300

Less: Accumulated Depreciation144,700261,860381,760

Net Fixed Assets-345,800--939,490-836,540

Total Assets--1,462,900--2,899,1503,600,620

Liabilities And Equity 2018 ($000) 2019 ($000) 2020e ($000)

Accounts Payable145,400323,550-358,000

Notes Payable-198,200699,700-296,800

Accruals-132,700-283,510-377,200

Total Current Liabilities-476,300-1,306,7601,032,000

Long-Term Debt-322,000980,000595,000

Common Stock460,000540,0001,600,000

Retained Earnings204,600-72,390373,620

Total Equity-664,600612,3901,973,620

Total Liabilities And Equity-1,462,900-2,899,1503,600,620

Table 2 - Hororata Inc. Income Statements

2018 ($000) 2019 ($000) 2020e ($000)

Sales 4,429,2005,831,3008,031,400

COGS excluding depreciation 2,860,5004,975,8005,795,000

Depreciation 18,500116,600-115,000

Other Expenses 325,000698,000-590,000

Total Operating Costs 3,204,000-5,790,400-6,500,000

EBIT 1,225,200-40,900-1,531,400

Interest Expense 61,000-173,600-68,000

EBT 1,164,200-132,7001,463,400

Taxes (40%) 465,680-( )585,360

Net Income 698,520-132,700878,040

Table 3 - Hororata Inc. Ratio Analysis

2018 2019 2020e Industry Average

Current Ratio (X) 2.35-1.502.00

Quick Ratio (X) 0.85-0.521.00

Inventory Turnover (X) 4.01-3.885.00

Average Age of Inventory (days) 90.9894.18-45.00

Average Collection Period (days) 28.8440.69-30.00

Average Payment Period (days) 18.5523.73-60.00

Fixed Asset Turnover (X) 12.81-6.219.00

Total Asset Turnover (X) 3.03-2.012.50

Debt Ratio (X) 0.55-0.790.40

Debt to Equity Ratio (X) 1.20-3.730.70

Times Interest Earned (X) 20.09-0.24--25.00

Gross Profit Margin (%) 35.4214.67--27.00

Operating Profit Margin (%) 27.66-0.70--16.00

Net Profit Margin (%) 15.77-2.28--12.00

Return on Total Assets (%) 47.75--4.58--30.00

Return on Equity (%) 105.1021.6735.00

Price/Earnings (P/E) Ratio (X) 21.4776.87--15.00

Market/Book Value Ratio (X) 11.63-9.628.00

Table 4 - Hororata Inc. other data

Stock Price ($) 75.0051.0060.00

Shares (units) 200,000200,000300,000

Earnings per Share ($) 3.49-0.662.93

Dividend per Share ($) 0.25( )0.20

Tax Rate (%) 40.0040.00-40.00

Book Value per Share ($) 6.450-5.300-6.200

Lease Payments ($) 50,00050,00050,000

REQUIRED:

Prepare a financial statement analysis of Hororata Inc. Your analysis should cover each of the followings:

1. Calculate the missing financial ratios for projected 2020 as in Table 3 and fill-in the answers.

2. Hororatas liquidity position (using current and quick ratios) in 2018, 2019, and projected

for 2020. Compare it to the industry averages. What actions should be taken to improve its liquidity position?

3. Hororatas operating and utilisation of assets projected (using inventory turnover, average age of inventory, average collection period, average payment period, fixed asset turnover, and total asset turnover) in 2018, 2019, and projected for 2020. Compare it to the industry averages. What actions should be taken to improve its operating and utilisation of assets position?

4. Hororatas financial leverage (using debt ratio, debt to equity ratio, and times-interest-

earned) in 2018, 2019, and projected for 2020. What actions should be taken to improve its financial leverage position?

5. Hororatas profitability (using gross profit margin, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE)) in 2018, 2019, and projected for 2020. Compare it to the industry averages. What actions should be taken to improve its profitability position?

6. Analyse the projected 2020 price/earnings ratio and market/book value ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Explain your answers.

7. Discuss the major strengths and weaknesses of the firm using the results of Du Pont

analysis as projected for 2020.

8. If one uses the industry average P/E ratio to estimate the firms share price in 2020, how much should it be? Comment on this method.

9. What are some potential problems and limitations of financial ratio analysis?

10. Perform a common size analysis and percent change analysis. What do these analyses tell you about Hororata? What actions should be taken to improve its overall financial position?