Jackelyn Maguillano

Hannylen Faye T. Valente

COAS II-A

Case Study #1: Bigger Isn’t Always Better!

1. How does Quickfix’s average compound growth rate in sales compare with its earnings growth rate
over the past five years?
CAGR in sales = ( Ending Value/ Beginning Value^⅕ ) -1
= ( 1,013,376/600,000^⅕)-1
= 0.1105
Average Compound Annual Growth Rate
= CAGR / No. of years
= 0.1105/ 5 years
=2.21%

Increasing sales will help the business generate more income while earnings growth is the profit
that the company has earned that would lead to the growth of the business. To analyze the business
growth both sales and earnings growth should increase. However, it is better if the net income or earnings
of the company must increase faster than the sales in order to say that the business is growing.

2. Which statements should Juan refer to and which ones should he construct so as to develop a fair
assessment of the firm’s financial condition? Explain why?

The statements should Juan refer to are the financial statements namely, balance sheet and
income statement from the past 3 to five years. First, is the Balance sheet where it provides an idea of the
company's financial condition, as well as displaying what the company owns and owes. It gives insight or
reason to invest or not in the company. Another statement is the Income statement where it offers a
recent picture of the company's revenues and expenses and its overall profitability. He should use these
as a basis to do a cash flow statement considering that it will help to recognize the inflow and outflow of
the cash. In terms of developing a fair assessment, the company should use various tools of financial
statement analysis such as Horizontal, vertical and ratio analysis to evaluate further the significance of
financial statement data.

3. What calculations should Juan do in order to get a good grasp of what is going on with Quickfix’s
performance?

Juan must calculate the various financial ratios of the business, specifically the five categories of
financial ratio analysis such as liquidity, profitability, asset management, financial leverage, and market
value ratio in order to express the relationship among selected items of financial statement data. These
ratios are beneficial in terms of evaluating a series of financial statement data and comparing trends from
prior performance or rather from the same business. The application of DuPont analysis would also help
Juan because it is a technique used to decompose the different drivers of return on equity (ROE).

4. Juan knows that he should compare Quickfix’s condition with an appropriate benchmark. How should
he go about obtaining the necessary comparison data?

To compare Quickfix’s condition with an appropriate benchmark, Juan should use the horizontal
analysis or trend analysis to compare what changes say, the net income or the net sales that have taken
place over a period of time, is it increasing or decreasing. Also, Juan could use industry average to use as
a benchmark in comparing an item or financial relationship of an entity with industry average or norms to
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

provide the information as to an entity’s relative performance within the industry. To measure the
company’s competitiveness positions, intercompany basis should be used in comparing the item of this
entity with the same or relationship in one or more competing entities. The comparison will be made
based on the published financial statement of the individual entities.

5. Besides comparison with the benchmark what other types of analyses could Juan perform to
comprehensively analyze the firm’s condition? Perform the suggested analyses and comment on your
findings.

For Juan to perform comprehensively analyze the firm’s condition, he can perform a common size
analysis of the financial statement and also a DuPont analysis of Return on Equity and Return on Assets.
Using a Common Size Analysis, the common size income statement shows that the firm's Cost of Goods
have increased since 2000. Operating expenses also rise from 9.51% to 10.4% of its sales. On the
contrary, the administrative, selling and interest expenses have decreased. The business needs to
assess and reduce the expenses.

Quickfix Auto Parts

Common Size Income Statements

2000 2001 2002 2003 2004

Net Sales 100% 100% 100% 100% 100%
Cost of Goods Sold 80% 82% 84% 85% 85%
Gross Profit 20% 18% 16% 15% 15%

Admin and Selling Expenses 5% 2.3% 2.2% 5% 4%

Depreciation 4.2% 3.8% 6.4% 5.7% 4.9%
Miscellaneous Expenses .3% .5% .7% 2% 1.5%
Total Operating Expenses 9.5% 6.7% 9.3% 12.7% 10.4%

EBIT 10.5% 11.3% 6.7% 2.3% 4.6%

Interest on ST Loans 2.5% 2.4% 1.8% 1.5% 1.3%
Interest on LT Loans 1.3% 1.2% 2.0% 1.7% 1.4%
Interest on Mortgage 2.0% 1.8% 2.4% 2.1% 1.8%
Total Interest 5.9% 5.5% 6.2% 5.4% 4.6%
Before-tax earnings 4.6% 5.8% .5% (3.1%) (.02%)
Taxes 1.8% 2.3% .2% (1.3%) (.01%)
Net Income 2.8% 3.5% .3% (1.9%) (.01%)

____________________________________________________________________________________
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

Quickfix Auto Parts

Common Size Balance Sheet

ASSETS 2000 2001 2002 2003 2004

Cash and Marketable Securities 24.2% 39.1% 7.6% 3% 1.9%

Accounts Receivable 1.6% 1.5% 2% 8% 9.3%
Inventory 39.0% 34.1% 50.2% 53.2% 57.8%

Total Current Assets 64.8% 74.7% 59.8% 64.1% 69%

Net Fixed Assets 35.2% 25.3% 40.2% 35.8% 31%

Total Assets 100% 100% 100% 100% 100%

LIABILITIES AND EQUITIES

Short-term Bank Loans 7.8% 18.3% 14% 15.1% 15.3%

Accounts Payable 1.6% 1.3% 2% 1.6% 1.7%
Accruals 0.8% 0.6% 0.7% .9% 1.2%

Total Currents Liabilities 10.2% 20.3% 16.8% 17.7% 18.2%

Long-term Bank Loans 9.9% 12.4% 19.7% 19.4% 18.9%

Mortgage 27.3% 21.9% 27.2% 27.4% 27.2%
Long-term debt 37.2% 34.2% 46.9% 46.9% 46.1%

Total Liabilities 47.4% 54.5% 63.7% 64.6% 64.4%

Common Stock (100,000 shares)

50% 40.4% 32.1% 32.8% 33%
Retained Earnings
2.6% 5% 4.2% 2.6% 2.6%
Total Equity 52.6% 45.4% 36.3% 35.3% 35.6%

Total Liabilities and Equity 100% 100% 100% 100% 100%

While the Common size balance sheet shows the cash balance that decreased from 24.22% to
1.90%. The levels of inventory and accounts receivable have gone up. In addition, the borrowed amount
of short -term and long term debt is similar to the business total assets. Since 2002 the equity has
decreased compared to its debt.
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

Du Pont Analysis
2000 2001 2002 2003 2004
Net Profit margin 2.77% 3.49% 0.27% -1.88% -0.01%

= ​Net income = ​$16,634 = ​$22,859 = ​$2,126 = ​$2,126 = ​ ($102)

Sales $600,000 $655,000 $780,000 $873,600 $1,013,376

For every peso of sale the company receives, it decreases its net profit margin from 2.77% to -0.01%
which gives a bad effect on the company because it's not profitable anymore.

Asset Turnover 0.94x 0.83x 0.78x 0.89x 1.05x

= ​ Sales =​ $600,000 = ​$655,000 = ​$780,000 = ​$873,600 = ​$1,013,376

Total Asset $640,000 $791,099 $995,948 $976,479 $968,503

For every peso of asset that the company utilize, it generates an increase in its assets turnover from .94
times to 1.05 times over the past 5 years.

Return on Asset (ROA) 2.60% 2.90% 0.21% -1.67% -0.01%

= Profit Margin x Asset = 2.77 x .94 = 3.49 x .83 = 0.27 x .78 = -1.88 x .89 = -0.01 x 1.05
Turnover

For every peso of asset that the company invested, it decreases from 2.60% to -0.01% of profit which
gives an impression that the company is no longer earning profits as it continues to invest money on it as
well as the fact that its current ROA is negative.

Financial Leverage 1.90 2.20 2.75 2.83 2.81

multiplier

=​ Total asset = ​$640,000 = ​$791,099 = ​$995,948 = ​$976,479 =​ $968,503

Common stock equity $336,634 $359,493 $361,619 $345,184 $345,082

Based on the financial leverage multiplier, the company increases its equity multiplier from 1.90 to 2.81
which indicates that the company is using a high amount of debt to finance assets, which means more
financial leverage for the company.

Return on Equity (ROE) 4.94% 6.38% 0.58% -4.73% -0.03%

= ROA x Financial = 2.60 x 1.90 = 2.90 x 2.20 = 0.21 x 2.75 =-1.67 x 2.83 = -0.01 x 2.81
leverage multiplier
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

For every peso of equity that Andre invested, he decreases earnings from 4.94% to -0.03% which
indicates that there is no current return of investment on Andre’s part in his business.

6. Comment on Quickfix’s liquidity, asset utilization, long-term solvency, and profitability ratios. What
arguments would have to be made to convince the bank that they should grant Quickfix the loan?

The business liquidity ratio is not that bad whereas it enhances over the past years with a current
ratio of 3.79. Although the quick ratio is only 0.62 and much of the business current asset is occupied by
the inventory. The ability to pay the business its current liabilities from the cash that the business put
aside to pay short term debt is not very good and has worsened significantly in the past 5 years. In Asset
Utilization the business inventory turnover and the receivables turnover has decreased since 2000. On
the other hand, the asset turnover increases compared to the level in over the five years. In addition, In
2004 the capital intensity ratio has declined which implies that it doesn't need much assets to generate
sales. The long-term solvency ratio or debt ratio of the business is 64% of the total assets. Considering
that the coverage ratios are very low and also the financial structure is a high risk for the business. Lastly,
the Profitability of the business has decreased throughout the past 3 years of its operation and seeing the
profitability ratio the business had already been facing a financial loss since 2003.

Liquidity Ratio
2000 2001 2002 2003 2004
Current Ratio 6.38:1 3.68:1 3.56:1 3.62:1 3.79:1

= ​Current Assets = ​$415,000 =​$591,099 =​$595,948 =​$626,479 =​$668,503

Current Liabilities $65,000 $160,606 $167,329 $173,296 $176,421

For every peso of current liability, the company’ s current assets are declining to pay it off from 6.38:1 to
3.79:1.

Quick Ratio 2.54:1 2:1 0.57:1 0.61:1 0.62:1

=​Current Assets-Inventories =($415,000- =($591,099- =($595,948 = ($626,479- =($668,503

Current Liabilities $250,000/ $270,000/ - $500,000/ $520,000/ - $560,000/
$65,000) $160,606) $167,329) $173,296) $176,421)

For every peso of current liability, the company is also declining its quick assets from 2.54 to 0.62 to pay
off its current liabilities.
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

Asset Utilization

2000 2001 2002 2003 2004

Inventory Turnover 1.92x 2x 1.31x 1.43x 1.54x
ratio

= ​Cost of Good Sold =​$480,000 = ​$537,100 = ​$655,200 =​ $742,560 = ​$861,370

Inventory $250,000 $270,000 $500,000 $520,000 $560,000

Every year, the company has lessen the replenishment of its inventory from 1.92 times to 1.54 times which
means that there are still many inventory that needs to be disposed of this year.

Days sales outstanding 6 days 6.7 days 9.4 days 32.4days 32.4 days

= ​Receivables = ​$10,000 = ​$12,000 = ​$20,000 = ​$77,653 = ​$90,078

Annual Sales/365 $600,000/365 $655,000/365 $780,000/365 $873,600/365 $1,013,376/365

Every year, the company increasingly collects its payment from 6 days to 32.4 days after a sale has been
made which is not good enough for its benchmark of DSO should be more than 45 days.

Fixed Assets Turnover 2.67x 3.28x 1.95x 2.50x 3.38x

= ​ Sales = ​$600,000 = ​$655,000 = ​$780,000 = ​$873,600 =​$1,013,376

Net Fixed Assets $225,000 $200,000 $400,000 $350,000 $300,000

For every peso of fixed asset that the company utilizes, it generates an increasing number of sales from
2.67 times to 3.38 times which means that the company is efficient in generating revenue based on its fixed
assets.

Total Assets Turnover 0.94x 0.83x 0.78x 0.89x 1.0x

= ​Sales =​ $600,000 = ​$655,000 = ​$780,000 = ​$873,600 =​$1,013,376

Total Assets $640,000 $791,099 $995,948 $976,479 $968,503

For every peso of asset that the company utilizes, it generates an increasing number of sales from .94
times to 1 time which means that the company is efficient in generating revenue from its assets.

Inventory Conversion 190.10 days 183.49 days 278.54 days 255.60 days 237.30 days
Period

= I​ nventory = ​$250,000 = ​$270,000 = ​$500,000 = ​$520,000 =​ $560,000

COGS/365 $480,000/365 $537,100/365 $655,200/365 $742,560/365 $861,370/365

The company replenished its inventory within 190.10 days in 2000 and now in 2004, it was able to replenish
its inventory within 237.30 days.
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

Long term Solvency Ratio

2000 2001 2002 2003 2004

Total debt to total 0.47% 0.55% 0.64% 0.65% 0.64%
assets
= ​$303,366 = ​$431,606 = ​$634,329 =​ $631,296 = ​$623,421
= ​Total debts $640,000 $791,099 $995,948 $976,479 $968,503
Total assets

​There is an increase in percent of total assets financed through debt from .47% last 2000 to .64% this
year.

Times interest 1.79x 2.06x 1.07x 0.42x 1.00x

Earned

= ​EBIT =​ $62,973 =​ $73,998 = ​$52,194 = ​$19,888 = ​$46,270

Interest Charges $35,250 $ 53,900 $48,650 $47,280 $46,440

​The company can cover its interest from 1.79 times in 2000 to 1.0 times its profit before interest and taxes
this year . Thus, there is a decrease of the number of times the company covers its interes times its profit.​

Payable Deferral 7.60 days 7.14 days 11.14 days 7.86 days 7.12 days
Period

= ​Payable = ​$10,000 = ​$10,506 =​ $19,998 = ​$15,995 = ​$16,795

Cost of sales per day $ 480,000/365 $537,100/365 $655,200/365 $742,560/365 $861,370/365

The average number of days it takes for the company to pay its own bills/accounts payable decreased from
7.60 days in the year of 2000 to 7.12 days this current year which indicates that the company is not fully
utilizing its cash position.
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

Profitability Ratio

2000 2001 2002 2003 2004

Operating Margin 0.10% 0.11% 0.07% 0.02% 0.05%

= ​EBIT = ​$62,973 = ​$73,998 = ​$52,194 = ​$19,888 = ​$46,270

Sales $600,000 $655,000 $780,000 $873,600 $1,013,376

The company makes a profit of .10% to .05% after paying for variable costs of production such as wages,
raw materials etc. Thus, there is a decrease of profit this year which means that there is not enough money
from its ongoing operations to pay for its variable costs as well as its fixed costs.

Profit Margin 2.77% 3.49% 0.27% -1.88% -0.01%

=​Net Income = ​$16,634 =​$22,859 = ​ $2,126 = ​($16,435) = ​ ($102)

Sales $600,000 $655,000 $780,000 $873,600 $1,013,376

For every peso of sale the company receives, it earns 2,77% to -0.01% this year which presents a
decrease on the earned income up to extent of having total loss this year.

Return on Total Assets 2.60% 2.89% 0.21% -1.68% -0.01%

=​Net Income =​ $16,634 =​$22,859 =​ $2,126 = ​($16,435) = ​($102)

Total Assets $640,000 $791,099 $995,948 $976,479 $968,503

For every peso of asset that the company invested, it decreases the profit from 2.60% to -0.01% which
means that the company does no longer gain profit this year rather a loss.

Basic Earnings Power 9.84% 9.35% 5.24% 2.04% 4.78%

= ​EBIT
Total Assets = ​$62,973 =​ $73,998 = ​$52,194 = ​$19,888 = ​$46,270
$640,000 $791,099 $995,948 $976,479 $968,503

The company generates income from 9.84% to 4.78% from its assets, thus there is a decrease in the BEP
this year which provides the idea that the company is not good in using its assets to earn income.

Return on Equity 4.94% 6.36% 0.59% -4.76% -0.03%

= ​Net Income = ​$16,634 =​$22,859 =​ $2,126 = ​($16,435) = ​($102)

Equity $336,634 $359,493 $361,619 $345,184 $345,082

For every peso of equity that Andre invested, he will earn no longer profits this year but a loss. And every
year, the return on equity decreases from 4.94% to -0.03%.
Jackelyn Maguillano
Hannylen Faye T. Valente
COAS II-A

7. If you were the commercial loan officer and were approached by Andre for a short-term loan of
$25,000, what would your decision be? Why?

If I were the commercial loan officer and were approached by Andre for a short- term loan of
$25,000, I would unpreferably grant his request due to his income losses in the company. Also, the return
on assets are too low to the extent that it is already negative as well for the reason that it’s quick assets
are very low so how will it be able to pay its current obligation including this short term loan of $25,000

8. What recommendations should Juan make for improvement, if any?

The recommendation that Juan should make for improvement is to reduce its expenses in the
business to maximize the income. Also, the company should utilize the assets properly in order to earn
profits and have a high return on assets as the company continues to invest. Another is that the company
should utilize its cash position in order to have a high average of days to pay its payables. Additional
investment is not necessary, rather the company should focus on inventory management in order to
replenish its inventory in a short period of time and will not accumulate until the next year.

9. What kinds of problems do you think Juan would have to cope with when conducting a comprehensive
financial statement analysis of Quickfix Auto Parts? What are the limitations of financial statement
analysis in general?

We think that Juan would have to cope with preparing the Statement of Cash Flows and also the
Statement of Owner’s Equity when conducting financial analysis. The financial analysis is very useful to
find out certain financial failures or weaknesses. However, financial statement analysis has its own
limitations. These limitations are financial analysis is a study of reports of the enterprise. The financial
statement analysis is limited knowing that Accountants and those knowledgeable enough in this area
could improve the business financial statement. Moreover , the financial analysis does not provide a clear
and complete picture of a company's financial operations.