MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million. Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014, profits fell sharply in 2016, causing Kaj to wonder what was happening to his "pride-and- joy" business venture. After all, Kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation. Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and unclut- tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing, structurally strong modern furniture. Danish furnishings and the home furnishings produced by other Scandinavian countriesSweden, Norway, and Finlandare made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics. Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden. As is typical in Europe, Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After learning the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing. Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints. SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2015 2016 $1,500,000 900,000 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation EBIT Interest Earnings before taxes Income taxes (40%) Net income Cash Dividends $1,300,000 780,000 520,000 130,000 150,000 40,000 200,000 45,000 155,000 62,000 $ 93,000 $ 0 600,000 150,000 150,000 53,000 247,000 57,000 190,000 76,000 $ 114,000 $ 74,000 $1,800,000 1,260,000 540,000 200,000 200,000 60,000 80,000 70,000 10,000 4,000 $ 6,000 $ 0 (continued on next page) Scandi Home Furnishings, Inc. (Continued) SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2014 2015 2016 Cash Accounts receivable Inventories Total current assets Fixed assets, net Total assets $ 50,000 200,000 450,000 700,000 $ 40,000 260,000 500,000 800,000 400,000 $1,200,000 $ 10,000 360,000 600,000 970,000 500,000 $1,470,000 300,000 $1,000,000 Accounts payable Accruals Bank loan Total current liabilities Long-term debt Common stock* Retained earnings Total liabilities and equity $ 130,000 50,000 90,000 270,000 300,000 350,000 80,000 $1,000,000 $ 170,000 70,000 90,000 330,000 400,000 350,000 120,000 $1,200,000 $ 180,000 80,000 184,000 444,000 550,000 350,000 126,000 $1,470,000 *350,000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scandi Home Furnishings was incorporated in mid-2013. Part A Your first challenge is to advise Kaj on what has been happening with Scandi Home Furnishings from a liquidity perspective. A. Kaj was particularly concerned by the drop in cash from $50,000 in 2014 to $10,000 in 2016. Calculate the average current ratio, the quick ratio, and the NWC-to-total-assets ratio for 20142015 and 20152016. What has happened to Scandi's liquidity position? B. Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build, cash burn, and the net cash build/burn positions for 2015 and 2016. What, if any, changes have occurred? Part B Your second challenge is to advise Kaj on what has been happening to Scandi from a financial leverage, profitability, and efficiency perspective. C. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to meet debt obligations in the event of financial distress, and the relative size of equity investments to debt levels. Calculate average ratios in each of these areas for the 20142015 and 20152016 periods. Interpret your results and explain what has happened to Scandi. D. Of importance to Kaj and the venture investors is the efficiency of the operations of the venture. Several profit margin ratios relating to the income statement are available to help analyze Scandi's performance. Calculate average profit margin ratios for 2014-2015 and 2015-2016 and describe what is happening to the profitability of Scandi Home Furnishings. E. Kaj and the venture investors are also interested in how efficiently Scandi is able to convert its equity investment, as well as the venture's total assets, into sales. Calculate several ratios that combine data from the income statements and balance sheets and compare what has happened between the 20142015 and 2015-2016 periods. F. An ROA model consisting of the product of two ratios provides an overview of a venture's efficiency and profitability at the same time. An ROE model consists of the product of three ratios and simultaneously shows an overview of a venture's efficiency, profitability, and leverage performance. Calculate ROA and ROE models for the 20142015 and 20152016 periods. Provide an interpretation of your findings. MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million. Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014, profits fell sharply in 2016, causing Kaj to wonder what was happening to his "pride-and- joy" business venture. After all, Kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation. Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and unclut- tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing, structurally strong modern furniture. Danish furnishings and the home furnishings produced by other Scandinavian countriesSweden, Norway, and Finlandare made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics. Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden. As is typical in Europe, Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After learning the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing. Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints. SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2015 2016 $1,500,000 900,000 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation EBIT Interest Earnings before taxes Income taxes (40%) Net income Cash Dividends $1,300,000 780,000 520,000 130,000 150,000 40,000 200,000 45,000 155,000 62,000 $ 93,000 $ 0 600,000 150,000 150,000 53,000 247,000 57,000 190,000 76,000 $ 114,000 $ 74,000 $1,800,000 1,260,000 540,000 200,000 200,000 60,000 80,000 70,000 10,000 4,000 $ 6,000 $ 0 (continued on next page) Scandi Home Furnishings, Inc. (Continued) SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2014 2015 2016 Cash Accounts receivable Inventories Total current assets Fixed assets, net Total assets $ 50,000 200,000 450,000 700,000 $ 40,000 260,000 500,000 800,000 400,000 $1,200,000 $ 10,000 360,000 600,000 970,000 500,000 $1,470,000 300,000 $1,000,000 Accounts payable Accruals Bank loan Total current liabilities Long-term debt Common stock* Retained earnings Total liabilities and equity $ 130,000 50,000 90,000 270,000 300,000 350,000 80,000 $1,000,000 $ 170,000 70,000 90,000 330,000 400,000 350,000 120,000 $1,200,000 $ 180,000 80,000 184,000 444,000 550,000 350,000 126,000 $1,470,000 *350,000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scandi Home Furnishings was incorporated in mid-2013. Part A Your first challenge is to advise Kaj on what has been happening with Scandi Home Furnishings from a liquidity perspective. A. Kaj was particularly concerned by the drop in cash from $50,000 in 2014 to $10,000 in 2016. Calculate the average current ratio, the quick ratio, and the NWC-to-total-assets ratio for 20142015 and 20152016. What has happened to Scandi's liquidity position? B. Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build, cash burn, and the net cash build/burn positions for 2015 and 2016. What, if any, changes have occurred? Part B Your second challenge is to advise Kaj on what has been happening to Scandi from a financial leverage, profitability, and efficiency perspective. C. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to meet debt obligations in the event of financial distress, and the relative size of equity investments to debt levels. Calculate average ratios in each of these areas for the 20142015 and 20152016 periods. Interpret your results and explain what has happened to Scandi. D. Of importance to Kaj and the venture investors is the efficiency of the operations of the venture. Several profit margin ratios relating to the income statement are available to help analyze Scandi's performance. Calculate average profit margin ratios for 2014-2015 and 2015-2016 and describe what is happening to the profitability of Scandi Home Furnishings. E. Kaj and the venture investors are also interested in how efficiently Scandi is able to convert its equity investment, as well as the venture's total assets, into sales. Calculate several ratios that combine data from the income statements and balance sheets and compare what has happened between the 20142015 and 2015-2016 periods. F. An ROA model consisting of the product of two ratios provides an overview of a venture's efficiency and profitability at the same time. An ROE model consists of the product of three ratios and simultaneously shows an overview of a venture's efficiency, profitability, and leverage performance. Calculate ROA and ROE models for the 20142015 and 20152016 periods. Provide an interpretation of your findings