Part 1 Vertical, Horizontal, and Ratio Analysis (40 marks)

Amiga Holdings Inc. is a manufacturer and distributor of imaging and data storage components. Because of some successful new products, the firm has recently undergone a period of explosive growth, more than doubling its revenues during the last two years. However, the growth has been accompanied by a marked decline in profitability and a significant drop in the companys share price. You have been retained by the company to analyse its performance to find out what is going wrong. You want to focus your thinking and ask the right questions, so you begin by analysing the firms financial statements over the last 3 years, which are shown below.

Amiga Holdings Inc. Income Statements for the years ending (in $000,000s) 2011 2010 2009 Revenue $ 3,265 2,106 1,578 COGS 1,502 906 631 Gross margin 1,763 1,200 947

Expenses Marketing 882 479 316 R & D 327 221 158 Administration 294 185 126 Total operating expenses 1,503 885 600

Operating Income (EBIT) 260 315 347 Interest expense 143 95 63 Earnings before Taxes 117 220 284 Taxes 40 75 97 Net Income 77 145 187

Amiga Holdings Inc. Balance sheets as of December 31 ($000,000) 2011 2010 2009 ASSETS Cash 62 40 30 Accounts Rec. 590 341 175 Inventory 300 151 90 Current Assets 952 532 295 Capital Assets-Gross 2,718 2,373 1,565 Less: acc. Amortization (1,135) (860) (610) Net Capital assets 1,583 1,513 955 Total assets 2,535 2,045 1,250

LIABILITIES AND EQUITY Accounts payable 134 81 56 Accruals 30 20 15 Current Liabilities 164 101 71 Long-term Debt 1,600 1,250 630 Equity 771 694 549 Total Liabilities and Equity 2,535 2,045 1,250 Use the provided Excel template. (include your calculations in the cells to show your work)

(a) Prepare a vertical analysis in Excel for the income statements for 2009, 2010 and 2011. Analyse the trend for each line in the income statement. Explain whether the vertical analysis indicates an improvement or deterioration for each account. (15 marks)

(b) Prepare a horizontal analysis in Excel for the income statements for 2010 and 2011. Analyse the trend for each line in the balance sheet and explain whether the horizontal analysis indicates an improvement or deterioration for each account. (10 marks)

(c) Use the provided template and textbook formulas to calculate the indicated ratios for all three years in Excel. Analyse the trends in each ratio and compare each with the industry average. What can you deduce from this information? Comment on each ratio and give an idea about what might be going on. (10 marks)