- John Lennin, CEO of Guitar Centered, has asked his new finance director, Paul McArthur, to
use cross-sectional ratio analysis to assess the firm's performance in 2018. John provided
Paul with six ratios for the firm for that year. Luckily, Paul has access to 2018 ratios from
Steak or Shake, the restaurant company he used to work for. Paul made a comparison table
for both sets of ratios (shown below). Based on his analysis Paul concluded that Guitar
Centered's performance was inferior on all six ratios and that the company was not
performing well. This was worrisome to Paul as the reason he left Steak or Shake earlier this
year was because the restaurant company was not meeting its growth targets and analysts
had predicted a grim future for the company. Paul decided he needed some fresh air and
went downstairs for a walk.(question and information on attachment).
Current Inventory Avg. Collection Total Asset Debt Net profit Ratio Turnover Period Turnover Ratio margin Guitar Centered 0.91 12 39 0.6 0.7 4.8% Steak or Shake 1.21 90 4 0.7 0.5 5.6% a. Is Paul right to make such conclusions? How may he improve his analysis? Explain. b. What alternative to cross-sectional ratio analysis can Paul use to assess the firm's performance?December 31, 2016 2015 2014 Current assets: Cash and cash equivalents 19,334 15,890 14,557 Marketable securities 6,647 3,918 2,859 Inventories 11,461 10,243 8,299 Accounts receivable, net and other 8,339 5,654 5,612 Total current assets 45,781 35,705 31,327 Property and equipment, net 29,114 21,838 16,967 Goodwill 3,784 3,759 3,319 Other assets 4,723 3,445 2,892 Total assets 83,402 64,747 54,505 Current liabilities: Accounts payable 25,309 20,397 15,459 Accrued expenses and other 13,739 10,372 9,807 Unearned revenue 4,768 3,118 1,823 Total current liabilities 43,816 33,887 28,089 Long-term debt 7,694 8,227 8,265 Other long-term liabilities 12,607 9,249 7,410 Stockholders' equity: Common stock 5 5 5 Treasury stock, at cost (1,837) (1,837) (1,837) Additional paid-in capital 17, 186 13,394 11,135 Accumulated other comprehensive loss (985) (723) (511) Retained earnings 4,916 2,545 1,949 Total stockholders' equity 19,285 13,384 10,741 Total liabilities and stockholders' equity 83,402 64,747 54,5052016 2015 2014 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,890 14,557 8.658 OPERATING ACTIVITIES: Net income (loss) 2,371 596 (241) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation of property and equipment, including internal-use 8,116 6,281 4,746 software and website development, and other amortization, including capitalized content costs Stock-based compensation 2,975 2,119 1,497 Other operating expense, net 160 155 129 Other expense (income), net (20) 250 59 Deferred income taxes (246) 81 (316) Excess tax benefits from stock-based compensation (829) (119) (6) Changes in operating assets and liabilities: Inventories (1,426) (2,187) (1,193) Accounts receivable, net and other (3,367) (1,755) (1,039) Accounts payable 5,030 4,294 1,759 Accrued expenses and other 1,724 913 706 Additions to unearned revenue 11,931 7,401 4,433 Amortization of previously unearned revenue (9,976) (6,109) (3,692) Net cash provided by (used in) operating activities 16,443 11,920 6,842 INVESTING ACTIVITIES: Purchases of property and equipment, including internal-use (6,737) (4,589) (4.893) software and website development, net Acquisitions, net of cash acquired, and other (116) (795) (979) Sales and maturities of marketable securities 4,733 3,025 3,349 Purchases of marketable securities (7,756) (4,091) (2,542) Net cash provided by (used in) investing activities (9,876) (6,450) (5,065) FINANCING ACTIVITIES: Excess tax benefits from stock-based compensation 829 119 6 Proceeds from issuance of long-term debt 621 353 6,359 Repayments of long-term debt and other (354) (1,652) (513) Principal repayments of capital lease obligations (3,860) (2,462) (1,285) Principal repayments of finance lease obligations (147) (121) (135) Net cash provided by (used in) financing activities (2,911) (3,763) 4,432 Foreign currency effect on cash and cash equivalents (212) (374) (310) Net increase (decrease) in cash and cash equivalents 3,444 1,333 5,899 CASH AND CASH EQUIVALENTS, END OF PERIOD 19,334 15,890 14,557Year Ended December 31, 2016 2015 2014 Net product sales 94,665 79.268 70,080 Net service sales 41,322 27,738 18,908 Total net sales 135,987 107,006 88,988 Operating expenses: Cost of sales 88,265 71,651 62,752 Fulfillment 17.619 13,410 10,766 Marketing 7,233 5,254 4,332 Technology and content 16,085 12,540 9,275 General and administrative 2,432 1,747 1,552 Other operating expense, net 167 171 133 Total operating expenses 131,801 104,773 88,810 Operating income 4,186 2,233 178 Interest income 100 50 39 Interest expense (484) (459) (210) Other income (expense), net 90 (256) (118) Total non-operating income (expense) (294) (665) (289) Income (loss) before income taxes 3,892 1,568 (111) Provision for income taxes (1,425) (950) (167) Equity-method investment activity, net of tax (96) (22) 37 Net income (loss) 2,371 596 (241)
