Sample project

Case Setting: It is Spring 2006 and you are looking for full-time employment. Plush Carpet Mill, Inc. (PCM) has offered you a position as manager of its San Antonio, Texas production facility. Before accepting the job, however, you want to evaluate PCMs financial performance to make sure it is a sound company. PCM has provided you a copy of its year-end 2003, 2004, and 2005 balance sheets and income statements

Liquidity Look at the current ratio and the quick (acid-test) ratio of PCM. What trends do you notice over 2003-05, and what does this suggest about PCMs liquidity? How does PCMs liquidity in 2005 compare with the industry average? Now study the accounts receivables turnover and inventory turnover of PCM. What do these patterns suggest about the firms conversion of accounts receivable and inventories to cash? Considering your answers to the two questions above, what is your overall assessment of PCMs liquidity position? What two major factors account for your assessment? Asset Management What is your assessment of the manner in which PCM is managing its assets? Pay attention to both trends and industry averages. Financing of Assets What is your assessment of the manner in which PCM is financing its assets? Pay attention to both trends and industry averages. What is the relationship between the total debt ratio and times interest earned as these relate to PCM? And is there any other possible explanation (outside of the firms financial statements) for the observed trend in times interest earned? Profitability 6. What can you say about PCMs operating profit margin and pre-tax net profit margin? 1 Explain any patterns observed. 7. How are PCMs pre-tax net profit margin, total asset turnover, and total debt ratio affecting the firms pre-tax return on assets (ROA) and return on equity (ROE)? What is your overall assessment of the firms profitability, including its earnings per share (EPS)? Cash Flow 8. Referring to PCMs statement of cash flow for 2004 and 2005, assess PCMs cash flow situation noting both inflows and outflows? Overall Evaluation Based on your answers to the questions above, what is your overall evaluation of PCMs financial condition? (Pull all your analysis together in answering this question.) What is the markets assessment of PCMs financial condition? Explain. Does the markets assessment confirm or refute your analysis? Based on your evaluation of PCM and the markets assessment of the firm, would you accept employment with the company? Explain.

(Exhibit 1), and you plan to obtain industry data from the 2004-2005 edition of Annual Statement Studies: Financial Ratio Benchmarks prepared by RMA-The Risk Management Association. Your task now is to assess the financial condition of PCM through both 1) a 2003-05 trend (historical) analysis and 2) a 2005 peer group (industry) analysis using 2005 data for PCM and RMA data for the carpet mill industry. Remember: In doing your analysis you are essentially telling a story about PCMs financial performance over the last few years and relative to other similar- sized firms in the industry.

Enter data from the financial statements of PCM found in Exhibit 1 into your template Compute the common-size balance sheet and income statement still within the template Compute the financial ratios Assign qualitative assessments of Good, OK/Good, OK, OK/Poor, or Poor to the trends in each of the firms financial ratios as well as to the degree to which the firms financial ratios are superior to the matching industry ratios (every cell containing an F).