I need step by step of this financial ratio analysis:
Stevens & Johnson, Inc.
Financial Ratio Analysis
Montgomery Howell, Vice President for investment analysis at First National Bank of Utah, is looking for a company to recommend to the banks portfolio committee for inclusion in its buy list for the various trust funds managed by First Nationals trust department. Howells criteria for recommending a company are that it be a good, fundamentally sound, long term prospect and not a hot stock. Howell hopes to convince the portfolio committee to take a long term view of the market rather than focus on short term price changes.
Howell recently read an article in the Wall Street Journal concerning Stevens & Johnson, Inc., a toy manufacturer. Stevens & Johnson had posted a six month pretax profit margin of 10 percent. While this was far below the 15% profit margins enjoyed before the market decline, it was far ahead of other companies in the industry. Perhaps Stevens & Johnson was a good long term investment.
The toy industry depended on three main factors for growth: the economy, demographics, and new product innovations on a regular basis. The average life for new products in the toy industry was only one or two Christmas seasons. Companies had two choices to maintain their sales strengths. Either they came up with regular product innovations or they relied on strong standby toys.
Stevens & Johnson had changed its marketing strategy during the past two years. Management was concentrating on its solid performing toys and moving away from the highly risky (yet potentially very profitable) promotional, faddish toys that had dominated the toy market over most of the past decade. However, for the past two years, shipments of the blockbuster toys had steadily declined, leaving the manufacturers with obsolete inventory and machinery. Two of Stevens & Johnsons three primary competitors had put too much emphasis on blockbuster toys. One was in Chapter 11 bankruptcy and the other had been forced to borrow to stay afloat. Its debt was now 88% of its total capital.
In contrast Stevens & Johnson and the other major competitor had bitten the bullet. They had trimmed overhead, written down inventories, and closed plants with excess capacity. Stevens & Johnson was focusing on its traditional toy line of stable toys, board games, and preschool games.
Today Stevens & Johnson has three new hot prospects for the future. First, the company recently announced the purchase of two operations that produced ride-on toys and outdoor furniture for children. These were expected to compliment Stevens & Johnsons solid array of preschool items. Second, Stevens & Johnson had just signed the toy license on what was expected to be this summers hottest childrens movie. Third Stevens & Johnson was rumored to be planning to enter the video game segment of the industry.
In preparation for the necessary analysis, Howell had collected his financial statements and industry data for the past five years. Exhibit 1 contains company income statements for the five years 2013 through 2017. Exhibit 2 provides comparable balance sheets. Exhibit 3 contains industry average percentage income statements, balance sheets, and ratios as reported by RMA Associates.
Prepare a detailed memo for Mr. Howell, with attached schedules that addresses the following questions:
1. Prepare a common size income statement and balance sheet for Stevens & Johnson for each of the years.
2. Calculate five years of relevant financial ratios for Stevens & Johnson (including profitability ratios, liquidity ratios, debt management ratios, asset management ratios, market value ratios and growth rates) and identify the relevant financial strengths, weaknesses, and trends of the company.
3. Compare the financial results of Stevens & Johnson with the industry and identify and discuss the areas where Stevens & Johnson is stronger or weaker than the industry.
4. Using the DuPont model analyze the return on equity for the past five years. Comment on the strengths and weaknesses uncovered by this analysis.
5. Given this analysis would you recommend Stevens & Johnson be included in First National Banks buy list? Explain why? Use the included Writing Rubric when preparing your memo. Exhibit 3 Industry Averages and Ratios Toy Manufacturers (Robert Morris & Associates, Annual Statement Studies)
Exhibit 1 Stevens & Johnson, Inc. Income Statements (thousands) 2013 2014 2015 2016 2017 Revenue Cost of Goods Sold Gross Profit 166,142 80,352 85,790 535,794 255,005 280,789 915,264 417,144 498,120 997,223 453,803 543,420 1,008, 817 485,507 523,310 Operating Expense General, Admin, & Sales Research & Development Depreciation Total Operating Expenses 53,903 6,596 3,825 64,324 154,989 16,443 10,575 182,007 286,703 30,259 14,600 331,562 327,916 43,276 25,507 396,698 332,785 52,104 39,058 423,947 Operating Profit Other Income Earnings Before Interest & Taxes Interest Expense 21,466 2,507 23,973 1,800 98,782 4,536 103,318 20,660 166,558 7,874 174,432 28,246 146,722 19,371 166,093 22,214 99,364 128 99,492 24,766 Earnings Before Taxes Income Taxes Net Income 22,173 10,751 11,423 82,658 43,367 39,291 146,186 71,960 74,227 143,879 69,509 74,369 74,726 38,559 36,167 Preferred Dividends 2,077 1,919 2,113 Earnings Available to Common Common Dividend 11,423 1,221 39,291 2,081 72,150 2,894 72,450 3,555 34,055 3,568 Retained Eamings 10,202 37,211 69,257 68,895 30,487 Outstanding Shares Earnings Per Share 24,413 $0.47 34,673 $1.13 36,165 $2.00 39,497 $1.83 39,638 $0.86 Average Price Per Share $3.85 $8.55 $15.55 $23.75 $18.25 Exhibit 2 Stevens & Johnson, Inc. Balance Sheets (thousands) 2013 2014 2015 2016 2017 Assets Current Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets 30,729 36,545 7,348 5,930 80,551 47,090 150,598 57,565 17,818 273,070 136,789 181,340 50,892 28,805 397,826 87,046 229,117 92,177 42,758 451,097 121,328 254,667 100,189 43,291 519,474 Gross Fixed Assets Accum Depreciation Net Fixed Assets 21,180 10,388 10,793 80,816 13,602 67,214 109,915 27,925 81,990 173,631 52,529 121,103 223,425 91,235 132,190 Other Assets 7,101 158,858 154,409 164, 196 155,330 Total Assets 98,444 499,142 634,225 736,395 806,994 Liabilities and Stockholders Equity Current Liabilities Accounts Payable A ccrued Expenses Accrued Taxes Short Term Debt Total Current Liabilities 15,092 14,246 8,217 977 38,532 22,762 79,307 17,993 62,553 182,615 34,392 107,014 18,365 20,015 179,786 68,357 80,963 23,140 31,856 204,315 66,179 86,317 19,637 55,798 227,931 Long Term Liabilities Long Term Debt Other Liabilities Total Long Term Liabilities 2,297 776 3,074 95,653 1,143 96,796 139,310 1,680 140,990 93,733 3,143 96,876 95,345 2,561 97,906 1,538 Stockholders Equity Preferred Stock Common Stock Retained Earnings Total Stockholders Equity 2,638 244,702 27,332 27,968 56,839 26,796 127,757 65,179 219,731 2,638 176,377 134,435 313,450 2,638 229,236 203,330 435,204 481,157 Total Liabilities and Stockholders Equity 98,444 499,142 634,225 736,395 806,994 Exhibit 3 Industry Averages and Ratios Toy Manufacturers (Robert Morris & Associates, Annual Statement Studies) 2013 2014 2015 2016 2017 Percentage Income Statements Revenue Gross Profit Operating Expenses Operating Profit All Other Expenses Profit Before Taxes 100.0% 34.7% 29.8% 4.8% 3.0% 1.8% 100.0% 35.0% 28.2% 6.8% 2.7% 4.1% 100.0% 34.6% 29.9% 4.7% 2.1% 2.7% 100.0% 35.1% 28.3% 6.8% 3.1% 3.7% 100.0% 35.0% 29.6% 5.4% 2.0% 3.4% Percentage Balance Sheet Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Net Fixed Assets Other Assets Total Assets 9.5% 29.0% 34.1% 2.3% 74.9% 19.0% 6.1% 100.0% 8.3% 30.4% 31.2% 3.2% 73.4% 19.7% 7.4% 100.0% 7.4% 28.7% 33.7% 1.9% 71.7% 20.5% 7.7% 100.0% 8.9% 31.0% 29.7% 3.4% 73.0% 19.1% 7.8% 100.0% 8.5% 28.0% 33.1% 2.6% 72.2% 18.4% 9.3% 100.0% Notes Payable Current Maturity - Long Debt Accounts Payable Accrued Taxes Other Current Liabilities Total Current Liabilities Long Term Debt Other Long Term Debt Stockholders Equity Total Liabilities and Equity 14.3% 2.8% 13.0% 0.0% 10.2% 40.3% 14.7% 4.7% 40.5% 100.0% 12.2% 2.8% 13.5% 0.0% 11.6% 40.1% 16.2% 3.5% 40.4% 100.0% 18.6% 2.8% 14.6% 0.7% 11.2% 47.9% 13.9% 3.4% 34.0% 100.0% 14.5% 4.6% 13.0% 1.6% 8.7% 42.4% 13.5% 2.8% 41.3% 100.0% 15.1% 4.0% 13.3% 1.7% 8.2% 42.3% 13.4% 3.1% 41.0% 100.0% 1.9 1.9 1.8 1.8 1.6 0.8 6.5 1.0 5.7 5.9 3.7 3.8 Ratios Current Quick Sales/Receivables Cost of Sales/Inventory Sales/Working Capital EBIT/Interest Total Debt/Net Worth % EBT/Equity %EBT/Total Assets Sales/Total Assets 5.5 6.0 1.8 160.0% 14.8% 6.5% 1.9 3.6 2.2 150.0% 20.2% 4.5 5.3 1.9 150.0% 17.1% 6.7 2.0 190.0% 18.5% 4.9% 1.7 5.9% 6.7% 170.0% 28.9% 7.8% 1.6 1.6 1.7 Exhibit 1 Stevens & Johnson, Inc. Income Statements (thousands) 2013 2014 2015 2016 2017 Revenue Cost of Goods Sold Gross Profit 166,142 80,352 85,790 535,794 255,005 280,789 915,264 417,144 498,120 997,223 453,803 543,420 1,008, 817 485,507 523,310 Operating Expense General, Admin, & Sales Research & Development Depreciation Total Operating Expenses 53,903 6,596 3,825 64,324 154,989 16,443 10,575 182,007 286,703 30,259 14,600 331,562 327,916 43,276 25,507 396,698 332,785 52,104 39,058 423,947 Operating Profit Other Income Earnings Before Interest & Taxes Interest Expense 21,466 2,507 23,973 1,800 98,782 4,536 103,318 20,660 166,558 7,874 174,432 28,246 146,722 19,371 166,093 22,214 99,364 128 99,492 24,766 Earnings Before Taxes Income Taxes Net Income 22,173 10,751 11,423 82,658 43,367 39,291 146,186 71,960 74,227 143,879 69,509 74,369 74,726 38,559 36,167 Preferred Dividends 2,077 1,919 2,113 Earnings Available to Common Common Dividend 11,423 1,221 39,291 2,081 72,150 2,894 72,450 3,555 34,055 3,568 Retained Eamings 10,202 37,211 69,257 68,895 30,487 Outstanding Shares Earnings Per Share 24,413 $0.47 34,673 $1.13 36,165 $2.00 39,497 $1.83 39,638 $0.86 Average Price Per Share $3.85 $8.55 $15.55 $23.75 $18.25 Exhibit 2 Stevens & Johnson, Inc. Balance Sheets (thousands) 2013 2014 2015 2016 2017 Assets Current Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets 30,729 36,545 7,348 5,930 80,551 47,090 150,598 57,565 17,818 273,070 136,789 181,340 50,892 28,805 397,826 87,046 229,117 92,177 42,758 451,097 121,328 254,667 100,189 43,291 519,474 Gross Fixed Assets Accum Depreciation Net Fixed Assets 21,180 10,388 10,793 80,816 13,602 67,214 109,915 27,925 81,990 173,631 52,529 121,103 223,425 91,235 132,190 Other Assets 7,101 158,858 154,409 164, 196 155,330 Total Assets 98,444 499,142 634,225 736,395 806,994 Liabilities and Stockholders Equity Current Liabilities Accounts Payable A ccrued Expenses Accrued Taxes Short Term Debt Total Current Liabilities 15,092 14,246 8,217 977 38,532 22,762 79,307 17,993 62,553 182,615 34,392 107,014 18,365 20,015 179,786 68,357 80,963 23,140 31,856 204,315 66,179 86,317 19,637 55,798 227,931 Long Term Liabilities Long Term Debt Other Liabilities Total Long Term Liabilities 2,297 776 3,074 95,653 1,143 96,796 139,310 1,680 140,990 93,733 3,143 96,876 95,345 2,561 97,906 1,538 Stockholders Equity Preferred Stock Common Stock Retained Earnings Total Stockholders Equity 2,638 244,702 27,332 27,968 56,839 26,796 127,757 65,179 219,731 2,638 176,377 134,435 313,450 2,638 229,236 203,330 435,204 481,157 Total Liabilities and Stockholders Equity 98,444 499,142 634,225 736,395 806,994 Exhibit 3 Industry Averages and Ratios Toy Manufacturers (Robert Morris & Associates, Annual Statement Studies) 2013 2014 2015 2016 2017 Percentage Income Statements Revenue Gross Profit Operating Expenses Operating Profit All Other Expenses Profit Before Taxes 100.0% 34.7% 29.8% 4.8% 3.0% 1.8% 100.0% 35.0% 28.2% 6.8% 2.7% 4.1% 100.0% 34.6% 29.9% 4.7% 2.1% 2.7% 100.0% 35.1% 28.3% 6.8% 3.1% 3.7% 100.0% 35.0% 29.6% 5.4% 2.0% 3.4% Percentage Balance Sheet Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Net Fixed Assets Other Assets Total Assets 9.5% 29.0% 34.1% 2.3% 74.9% 19.0% 6.1% 100.0% 8.3% 30.4% 31.2% 3.2% 73.4% 19.7% 7.4% 100.0% 7.4% 28.7% 33.7% 1.9% 71.7% 20.5% 7.7% 100.0% 8.9% 31.0% 29.7% 3.4% 73.0% 19.1% 7.8% 100.0% 8.5% 28.0% 33.1% 2.6% 72.2% 18.4% 9.3% 100.0% Notes Payable Current Maturity - Long Debt Accounts Payable Accrued Taxes Other Current Liabilities Total Current Liabilities Long Term Debt Other Long Term Debt Stockholders Equity Total Liabilities and Equity 14.3% 2.8% 13.0% 0.0% 10.2% 40.3% 14.7% 4.7% 40.5% 100.0% 12.2% 2.8% 13.5% 0.0% 11.6% 40.1% 16.2% 3.5% 40.4% 100.0% 18.6% 2.8% 14.6% 0.7% 11.2% 47.9% 13.9% 3.4% 34.0% 100.0% 14.5% 4.6% 13.0% 1.6% 8.7% 42.4% 13.5% 2.8% 41.3% 100.0% 15.1% 4.0% 13.3% 1.7% 8.2% 42.3% 13.4% 3.1% 41.0% 100.0% 1.9 1.9 1.8 1.8 1.6 0.8 6.5 1.0 5.7 5.9 3.7 3.8 Ratios Current Quick Sales/Receivables Cost of Sales/Inventory Sales/Working Capital EBIT/Interest Total Debt/Net Worth % EBT/Equity %EBT/Total Assets Sales/Total Assets 5.5 6.0 1.8 160.0% 14.8% 6.5% 1.9 3.6 2.2 150.0% 20.2% 4.5 5.3 1.9 150.0% 17.1% 6.7 2.0 190.0% 18.5% 4.9% 1.7 5.9% 6.7% 170.0% 28.9% 7.8% 1.6 1.6 1.7
