Please complete the financial analysis of HiTop Toys per the attached files.

HiTop Toys, Inc.

Financial Ratio Analysis

30 Points Possible

Charles Stevens, vice president for investment analysis at First National Bank of Florida, 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. Stevens criteria for recommending a company were that it be a good, fundamentally sound, long term prospect and not a hot stock. Since the stock market crash, portfolio returns had been rather weak. Stevens hoped to convince the portfolio committee to take a long term view of the market rather than focus on short term price changes.

Stevens had recently read an article in the Wall Street Journal concerning HiTop Toys, Inc., a toy manufacturer. HiTop 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 HiTop 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.

HiTop 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 the 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 HiTops 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 HiTop and the other major competitor had bitten the bullet. They had trimmed overhead, written down inventories, and closed plants with excess capacity. HiTop was focusing on its traditional toy line of stable toys, board games, and preschool games.

Today HiTop 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 HiTops solid array of preschool items. Second, HiTop had just signed the toy license on what was expected to be this summers hottest childrens movie. Third HiTop was rumored to be planning to enter the video game segment of the industry.

In preparation for the necessary analysis, Stevens had collected his financial statements and industry data for the past five years. Exhibit 1 contains company income statements for the five years xx01 through xx05. Exhibit 2 provides comparable balance sheets. Exhibit 3 contains industry average percentage income statements, balance sheets, and ratios as reported by Robert Morris and Associates.

Prepare a report/memo, with attached schedules that addresses the following questions:

1. Prepare a common size income statement and balance sheet for HiTop for each of the years.

2. Calculate five years of relevant financial ratios for HiTop (including profitability ratios, efficiency ratios, liquidity ratios, debt ratios, dividend ratios, and growth rates) and identify the relevant financial strengths, weaknesses, and trends of the company.

3. Compare the financial results of HiTop with the industry and identify and discuss the areas where HiTop 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 HiTop be included in First National Banks buy list? Explain why?

submit both your report and the Excel file