Case Analysis

By: Group 12 Aayushi (02), Alakshendra (06), Durgesh (21), Samarth(48)

Background
History of Organization Main Problems

Reasons
What Next

1988 Net Sales % Increase $1697 NA

1989 $2013 18.62%

1990 $2694 33.83%

Expected 1991 $3600 29.92%

% increase in sales of Butler Lumber Company

Butler is having a loan of $70000 to be paid in 10 years . $247,000 loan to Sub-urban National Bank. 2% discount on payment with 10 days invoice.

Personal House*

$72000

Insurance Policy

$70000

House on Wifes name

$55000

* Personal House is mortgaged for $38000.

Liquidity Ratio

Formula

1988

1989

1990

1991 Q1

Comments

Current Ratio

(Current Assets)/ (Current liabilities) (Current Assets Inventory)/(Cu rrent Liabilities)

1.80x

1.59x

1.45x

1.35x

Trend is getting Worse

Quick Ratio

0.88x

0.72x

0.67x

0.54x

Trend is getting Worse

Cash Ratio

(Cash)/(Curren t Liabilities)

0.22x

0.13x

0.08x

0.04x

Trend is getting Worse

Financial Leverage Ratio

Total Debt Ratio

Formula

1988

1989

1990

Comments

(Total Assets Total Equity)/Total Assets (Total Debt)/(Total Equity) Total Assets/ Total Equity EBIT/Interest

55%

59%

63%

Trend towards increased leverage

Debt-Equity Ratio Equity Multiplier Times Interest Earned

1.20x 2.20x 3.85x

1.42x 2.42x 3.05x

1.68x 2.68x 2.61x

Interest expense is increasing

Cash Coverage
Number of Days Payable

EBIT+Depreciati on/Interest
Accounts Payable*365/An nual Purchases

3.85x
35 days

3.05x
46 days

2.61x
46 days
Good position helping cash flow

Asset utilization ratio Inventory Turnover

Formula
COGS/Inventory

1988 5.11x

1989 4.42x

1990 4.67x

Comments
Projected sales is increasing inventory on hand Taking longer to turn Inventory

Days Sales Inventory Receivables Turnover Days Sales in A/R Total Asset Turnover Capital Intensity

365 / Inventory turnover Sales/accounts receivable 365/receivables turnover Sales/total assets Total assets/sales

71 days 9.92x 37 days 2.86x 0.35x

83 9.07x 40 days 2.74x 0.37x

78 8.50x 43 days 2.89x 0.35x

Taking longer to receive payment stable stable

Profitability Ratio

Formula

1988

1989

1990

Comments

Profit Margin

NI/Sales

1.83%

1.69%

1.63%

Decreasing trend is concern

ROE

NI/Total Equity

11.48%

11.18%

12.64%

ROA

NI/Total Assets

5.22%

4.62%

4.72%

Calculations Projected income statement for 1991 (thousands of dollars) 1991 $ 3,600 $418 $2,736 $3,154 $562 $2,592 $1,008 $900 $108 $42 $53 $97 $21 $76 Value $ 3,600 Assumptions Explanation

Net sales Cost of goods sold: Beginning inventory Purchases Total goods available for sale Ending inventory Total cost of goods sold Gross Profit Operating expenses Operating Profit Purchase Discounts* Interest expense** Net income before income taxes Provision for income taxes Net income

given in case from Ex 1 76% historical - 75% of sales computed value (beg inv + purch end inv) 72% historical % of sales 25% historical % of sales

2% (of purch after Q1) assumption (of average outstanding balance) 10.50% assumption 34% schedule given in footnote 1

Projected balance sheet for December 31, 1991 (thousands of dollars) 1991 Assets: Cash $54 Accounts receivable, net (12% of sales) $432 Inventory $562 Current Assets $1,048 Property, net $216 Total Assets $1,264 Liabilities: Accounts payable Accrued expenses Long-term debt, current portion Bank note payable (plug) Current Liabilities Long-term debt Total Liabilities Net worth Total Liabilities plus net worth

1.50% recent % of sales 12% recent % of sales computed value from above 6% recent % of sales

$75 $54 $ 7 $661 $797 $43 $840 $424 $1,264 $

10 days of purchases 1.50% historical % of sales 7 constant amortization computed plug value computed value computed value

Asset - (TL+NW except for Bank note)

$661

computed value

Increase in sales
1988 1989 1990 1991 (expected) $3500 29.92%

Net Sales % increase

$1697 NA

$2013 18.62%

$2694 33.83%

Company relying heavily on borrowed funds Use the money to pay the accounts payable

Relying on trade credit, 2% 10 days , heavy need of cash What if there is recession?? Although sales are increasing: no plans of hiring manpower. Can lead to inefficiency Day sales A/R ratio decreasing Efforts on inventory management to check on stagnant inventory

Butler Lumber Company was a profitable business Net income growing at slower rate than operating expenses Better inventory management will increase the cash fund and free up the warehouses