Integrated Cast Part II (Ch.4)
Part I of this case, presented in Chapter 3, discussed the situation of DLeon Inc., a regional snack foods producer, after an expansion program. DLeon had increased plant capacity and undertaken a major marketing campaign in an attempt to go national. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firms survival.
Donna Jamison was brought in as assistant to Fred Campo, DLeons chairman, who had the task of getting the company back into a sound financial position. DLeons 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in tables 4.1 and 4.2 below. In addition, table 4.3 below gives the companys 2017 and 2018 financial rations, together with industry average data. The 2019 projected financial statement data represent Jamisons and Campos best guess for 2019 results, assuming that some new financing is arranged to get the company over the hump.
Jamison examined monthly data for 2018 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than DLeons managers anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run.
Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear expectations, not yes or no answers.
Answer questions A-M; use the tables provided below.
Why are ratios useful? What are the five major categories of ratios? Calculate D'Leon's 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2017, in 2018, and as projected for 2019? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratios? Explain your answer a. b. Caleulate the 2 assets turnover. How does D'Leon c. 019 inventory turnov er, days sales outstanding (DSO), fixed assets tumover, and total s uliation of assets stack up against other firms in the industry? times intered-earned ration How does tYLeon compare with d. Calculate the 2019 debt-d the industry with ropect to Cakculate the 201 retum on equily (ROE), and return ncial leverage? What can you conclude from these ration? rgin, profit margin, basic earning power (BEP), returm on assets (ROA n invested capital (ROIC). What can you say about thme ratios? t. Calculate the 2019 prike/earnings ratio and market/book ratio. Do these ratics i are expected to have a high or low opinion of the company? Use the Dul'ont equation to projected for 2719. What are the firm's major str rovide a summary and overview of ITLcon's financial condition as h. Use the following simplified the Ds0 would2019 balance sheet toshow, in general terms, how an improwement in bala the DSO would tion procedures and thereby lower its DsO tend to atfect the stock price. For example, if the company could improve its collec sands below) and influence the stock pric? from 456 days to the 32-day industry average without ww would that change "ripple through the financial staterments (shown in thou Accounts recehable Other current asets Net frred amsets Cutrent unblees Debt quity Does it appear that inventories could be adjusted? If so, how should that adjustment affect trLeon profitability and stock price? - In 201s, the ampany paid its suppliers much later than the due dates; also, it was not maintaining financial ratios at levels called for in its bank loan agroements. Therefore, suppliers could cut the com pany off, and its bank could refuse to renew the loan when it comes due in 90 days. On the basis of data provided, would you, as a credit managet, continue to sell to D'Leon on credit? (You could demand cash on delivery that is, sell on terms of CoD-but that might cause D'Leun to stop buying from your company) Similarly, if you wene the bank loan offleer, would you recommend renewing the loan or demanding its repayment? Would your actions be influenced if.n early 2019, D'Leon showed you its 2019 projections along with proof that it was going to raise more than 51.2 million of new equity k. In hindsight, what should DVLeon have done in 2017? What are some potential problems and limitations of financial ratio analysis? m. What are some qualitative factors that analysts should consider when evaluating a company's ikely future financial performance? Balance Sheets TABLE 1C 4.1 2019E Assets Cash Accounts eeceivable Inverdories $ 7,282 % 57600 151,200 1.287.300 51924802 ,124,000 $2,680112 Total current assees Gross fixed assets Less accurmulated depreciation 1,202,950 261160 5 91990 $2.866592 3H400 Net fxed assets Total assets Liabilities and Equity Accounts payable Acrruals Notes payable 3A97152 145,600 136,000 200000 5 431,600 436,800 524,10 408,000 00.000 $1,144,800 400,000 489,600 636 808 51,650568 Total curert liabilities Long term debt Common stock Retained earnings 460000 40000 201768 5 663,76s 1455 R00 $1,952352 492,592 Total equity total labties and equity Note E indicates estimated. The 2019 data are forecasts Income Statements TABLE IC 4. 2019E 6,034,000 2804000 Cost of goods sold 19,988 Tetal operating costs escluding depreciation and 3.222677 $ 209,322 s647592 13988) 209328 6.047.9 32 anveetiration EBITDA Depreciation and amortization S 13.988) 116,960 492,648 ( 130948 116,960 18,900 10428 136012 Interest expense ($ 266960) (106.784 S 422640 $146600 Taxes (40%) Net income 5253584 5 10176 .20 $ 1.602) 5 0,110 4926 0280 $ 0.220 1014 5 7809 Book value per share Stock price Shares outstanding Tax rate Lease payments Sinking fund payments Note: E indicates estimated. The 2019 data are forecasts The firm had suficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018. 12.17 40.00% 40,000 TABLE IC 43 Ratio Analysis 2019E 2017 Industry Average 04X 10x Inventory turnover Days sales outstanding tDSOr Foxed assets turnover Total assets turnover Debt-to-capital ratio 37.4 70x 21x 73.4% Operating margin Basic earning power 19.1% 13.3% -14x Book value per share Note: E indicates estimated. The 2019 data are forecasts Calculation is based on a 365-day year
