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 Bank?s ?buy list?? Explain why?

FIN 3100 Principals of Finance Fall 2016 Case Study #1 - 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 bank's portfolio committee for inclusion in its \"buy list\" for the various trust funds managed by First National's trust department. Steven's 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 HiTop's 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 HiTop's solid array of preschool items. Second, HiTop had just signed the toy license on what was expected to be this summers hottest children's 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 Bank's \"buy list\"? Explain why? Exhibit 1 HiTop Toys, Inc. Income Statements (thousands) xx01 xx02 xx03 xx04 xx05 Revenue Cost of Goods Sold Gross Profit 221,522 107,136 114,386 714,392 340,007 374,385 1,220,352 556,192 664,160 1,329,631 605,071 724,560 1,345,089 647,342 697,747 Operating Expense General, Administrative, and Selling Expenses Research & Development Depreciation Total Operating Expenses 71,871 8,794 5,100 85,765 206,652 21,924 14,100 242,676 382,271 40,345 19,467 442,083 437,221 57,701 34,009 528,931 443,713 69,472 52,077 565,262 Operating Profit Other Income Earnings Before Interest & Taxes Interest Expense 28,621 3,343 31,964 2,400 131,709 6,048 137,757 27,546 222,077 10,499 232,576 37,661 195,629 25,828 221,457 29,619 132,485 171 132,656 33,021 Earnings Before Taxes Income Taxes Net Income 29,564 14,334 15,230 110,211 57,823 52,388 194,915 95,946 98,969 191,838 92,679 99,159 99,635 51,412 48,223 0 0 2,769 2,559 2,817 Earnings Available to Common Common Dividend 15,230 1,628 52,388 2,774 96,200 3,858 96,600 4,740 45,406 4,757 Retained Earnings 13,602 49,614 92,342 91,860 40,649 Outstanding Shares Earnings Per Share 32,550 $ 0.47 46,230 $ 1.13 $ 48,220 2.00 $ 52,663 1.83 $ 52,850 0.86 Average Price Per Share $ 3.85 $ 8.55 $ 15.55 $ 23.75 $ 18.25 Preferred Dividends Exhibit 2 HiTop Toys, Inc. Balance Sheets (thousands) xx01 xx02 xx03 xx04 xx05 62,786 200,797 76,753 23,757 364,093 $ 182,385 241,786 67,856 38,407 530,434 $ 116,061 305,489 122,902 57,010 601,462 $ 161,770 339,556 133,585 57,721 692,632 Assets Current Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets $ 40,972 48,726 9,797 7,906 107,401 Gross Fixed Assets Accum. Depreciation Net Fixed Assets 28,240 13,850 14,390 107,755 18,136 89,619 146,553 37,233 109,320 231,508 70,038 161,470 297,900 121,647 176,253 9,468 211,810 205,879 218,928 207,107 131,259 665,522 845,633 981,860 1,075,992 Other Assets Total Assets $ Liabilities and Stockholders Equity Current Liabilities Accounts Payable Accrued Expenses Accrued Taxes Short Term Debt Total Current Liabilities $ 20,122 18,995 10,956 1,303 51,376 $ 30,349 105,742 23,991 83,404 243,486 $ 45,856 142,685 24,486 26,687 239,714 $ 91,142 107,950 30,853 42,475 272,420 $ 88,239 115,089 26,183 74,397 303,908 Long Term Liabilities Long Term Debt Other Liabilities Total Long Term Liabilities 3,063 1,035 4,098 127,537 1,524 129,061 185,746 2,240 187,986 124,977 4,191 129,168 127,127 3,414 130,541 Stockholders Equity Preferred Stock Common Stock Retained Earnings Total Stockholders Equity 2,051 36,443 37,291 75,785 35,728 170,342 86,905 292,975 3,517 235,169 179,247 417,933 3,517 305,648 271,107 580,272 3,517 326,269 311,757 641,543 131,259 665,522 845,633 981,860 1,075,992 Total Liabilities and Stockholders Equity Exhibit 3 Industry Averages and Ratios Toy Manufacturers (Robert Morris & Associates, Annual Statement Studies) xx01 xx02 xx03 xx04 xx05 Percentage Income Statements Revenue Gross Profit Operating Expenses Operating Profit All Other Expenses Profit Before Taxes 100.0% 34.7% 29.8% 4.8% 3.0% 1.8% 100.0% 35.0% 28.2% 6.8% 2.7% 4.1% 100.0% 34.6% 29.9% 4.7% 2.1% 2.7% 100.0% 35.1% 28.3% 6.8% 3.1% 3.7% 100.0% 35.0% 29.6% 5.4% 2.0% 3.4% Percentage Balance Sheet Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Net Fixed Assets Other Assets Total Assets 9.5% 29.0% 34.1% 2.3% 74.9% 19.0% 6.1% 100.0% 8.3% 30.4% 31.2% 3.2% 73.4% 19.7% 7.4% 100.0% 7.4% 28.7% 33.7% 1.9% 71.7% 20.5% 7.7% 100.0% 8.9% 31.0% 29.7% 3.4% 73.0% 19.1% 7.8% 100.0% 8.5% 28.0% 33.1% 2.6% 72.2% 18.4% 9.3% 100.0% Notes Payable Current Maturity - Long Debt Accounts Payable Accrued Taxes Other Current Liabilities Total Current Liabilities Long Term Debt Other Long Term Debt Stockholders Equity Total Liabilities and Equity 14.3% 2.8% 13.0% 0.0% 10.2% 40.3% 14.7% 4.7% 40.5% 100.0% 12.2% 2.8% 13.5% 0.0% 11.6% 40.1% 16.2% 3.5% 40.4% 100.0% 18.6% 2.8% 14.6% 0.7% 11.2% 47.9% 13.9% 3.4% 34.0% 100.0% 14.5% 4.6% 13.0% 1.6% 8.7% 42.4% 13.5% 2.8% 41.3% 100.0% 15.1% 4.0% 13.3% 1.7% 8.2% 42.3% 13.4% 3.1% 41.0% 100.0% Ratios Current Quick Sales/Receivables Cost of Sales/Inventory Sales/Working Capital EBIT/Interest Total Debt/Net Worth % EBT/Equity %EBT/Total Assets Sales/Total Assets 1.9 0.9 6.9 3.7 6.0 1.8 160.0% 14.8% 6.5% 1.9 1.9 1.0 6.1 3.4 5.1 2.2 150.0% 20.2% 5.9% 1.6 1.6 0.8 6.5 3.8 6.7 2.0 190.0% 18.5% 4.9% 1.7 1.8 1.0 5.7 4.5 5.3 1.9 150.0% 17.1% 6.7% 1.7 1.8 1.0 5.9 4.1 5.5 3.6 170.0% 28.9% 7.8% 1.6