Case Studies in finance - Case 2.ppt

1、Case Studies in finance,Applying theory to practice,Case Topics,Cash Flow Analysis Signal Cable Company (page 1) 2. Financial Ratio Analysis Bigger Isnt Always Better (page 5) 3. Financial Analysis and Forecasting There is More to Us Than Meets the Eye! (page 21) 4. Financial Analysis (Krispy Kreme

2、Doughnuts) 5. Bond Analysis and Valuation Corporate Bonds They are more complex Than you Think (page 45),Case studies,Lets get started with case 2 in your book,CASE 2: BIGGER ISNT ALWAYS BETTER,Objective: financial ratio analysis,Case 2,When doing financial analysis ,Ask the following questions: Is

3、the companys revenue growing? Is the company actually making a profit? Is the company in a strong enough position to beat out its competitors in the future? Is it able to repay its debts? Is management trying to “cook the books”?,Financial analysis ,Try to understand how to go (dig) deep into the co

4、mpanys financial statements and identify the “red flags” and “gold nuggets” of a company In other words, want to know the important factors that make or break an investment decision,Financial analysis focuses on ,Short-term liquidity: a companys ability meet short-term obligations Funds flow: future

5、 availability and disposition of cash Return on investment: a companys ability to provide financial rewards sufficient to attract and retain suppliers of financing Asset utilization: asset intensity in generating revenues to reach a sufficient level of profitability Operating performance: a companys

6、 success at maximizing revenues and minimizing expenses from long-run operating activities,Financial analysis ,Each are using the financial analysis for different particular objectives: Short-term creditors place emphasis on immediate liquidity of the business because they seek an early payback of t

7、heir investment Long-term investors in bonds are primarily concerned with the long-term asset position and earning power of the company The equity investor is primarily interested in long-term earning power of the company, its ability to grow, and pay dividends and increase in value.,Financial Analy

8、sis Using Ratios,Liquidity Ratios Asset Utilization Ratios Long Term Solvency Ratios Profitability Ratios Common-Size Statements Cash Flow Analysis,Liquidity Ratios,Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Cash + Marketable Securities + Accounts Receivables) / Current Liab

9、ilities Cash Ratio = Cash / Current Liabilities,Asset Utilization Ratios,Inventory Turnover Ratio = Cost of Goods Sold / Inventory Days sales in Inventory = 365 / Inventory Turnover Receivables Turnover = Sales / Receivables Days Sales in Receivables =365 / Receivables Turnover Total Asset Turnover

10、= Sales / Total Assets or Capital Intensity = Total Assets / Sales,Solvency Ratios,Total Debt Ratio = Debt / Total Assets Debt-Equity Ratio = Debt / Equity Equity Multiplier = Total Assets / Equity Time Interest Ratio = EBIT / Interest Expense Cash Coverage Ratio = (EBIT + Non-cash expenses) / Inter

11、est Expense *Non-cash expenses include depreciation and amortization,Profitability Ratios,Profit Margin = Earnings after taxes / Sales ROA = Net Income / Assets ROE = Net Income / Equity,DuPont Analysis,ROE,=,Net Income,Equity,=,Net Income,Sales,Assets,Equity,Sales,Assets,x,x,Profit Margin,Asset Tur

12、nover,Equity Multiplier,Common-Size Statements,Income Statement Balance Sheet How do we do it? Why?,8 Signs of Financial Stress in a Company,Negative Cash Flow High Debt-Equity Ratio Interest Coverage Ratio Share price decline Profit Warnings Insider trading Resignations Stock market (SEC) investiga

13、tions,Source: Article in I,CASE 1: BIGGER ISNt ALWAYS BETTER!,Andre Pires opened his automobile parts store, Quickfix Auto Parts, five years ago, in a mid-sized city located in the mid-western region of the United States. Having worked for an automobile dealership, first as a technician, and later a

14、s the parts department manager, for over 15 years, Andre had learned the many nuances of the fiercely competitive automobile servicing business. He had developed many contacts with dealers and service technicians, which came in really handy when establishing his own retail store.,Case 2,CASE 1: BIGG

15、ER ISNt ALWAYS BETTER!,Andre Pires opened his automobile parts store, Quickfix Auto Parts, five years ago, in a mid-sized city located in the mid-western region of the United States. Having worked for an automobile dealership, first as a technician, and later as the parts department manager, for ove

16、r 15 years, Andre had learned the many nuances of the fiercely competitive automobile servicing business. He had developed many contacts with dealers and service technicians, which came in really handy when establishing his own retail store.,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,Business had pic

17、ked up significantly well over the years, and as a result, Andre had more than doubled his store size by the third year of operations. The industry and local forecasts for the next few years were very good and Andre was confident that his sales would keep growing at or above recent levels.,Case 2,CA

18、SE 1: BIGGER ISNt ALWAYS BETTER!,Business had picked up significantly well over the years, and as a result, Andre had more than doubled his store size by the third year of operations. The industry and local forecasts for the next few years were very good and Andre was confident that his sales would

19、keep growing at or above recent levels.,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,However, Andre had used up most of his available funds in expanding the business and was well aware that future growth would have to be funded with external sources of funds. What was worrying Andre was the fact that o

20、ver the past two years, the stores net income figures had been negative, and his cash flow situation had gotten pretty weak. He figures that he had better take a good look at his firms financial situation and improve it, if possible, before his suppliers found out. He knew fully well that being shut

21、 out by suppliers would be disastrous!,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,However, Andre had used up most of his available funds in expanding the business and was well aware that future growth would have to be funded with external sources of funds. What was worrying Andre was the fact that ov

22、er the past two years, the stores net income figures had been negative, and his cash flow situation had gotten pretty weak. He figures that he had better take a good look at his firms financial situation and improve it, if possible, before his suppliers found out. He knew fully well that being shut

23、out by suppliers would be disastrous!,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,Andres knowledge of finance and accounting, not unlike many small businessmens, was very limited. He had often entertained the thought of taking some financial management courses, but could never find the time. One day,

24、at his weekly bridge session, he happened to mention his problem to Tom Andrews, his long time friend and bridge partner. Tom had often given him good advice in the past and Andre was desperate for a solution. “Im no finance expert, Andre,” said Tom, “but you might want to contact the finance depart

25、ment at our local universitys business school and see if you can hire an MBA student as an intern. These students can often be very insightful, you know.”,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,Andres knowledge of finance and accounting, not unlike many small businessmens, was very limited. He ha

26、d often entertained the thought of taking some financial management courses, but could never find the time. One day, at his weekly bridge session, he happened to mention his problem to Tom Andrews, his long time friend and bridge partner. Tom had often given him good advice in the past and Andre was

27、 desperate for a solution. “Im no finance expert, Andre,” said Tom, “but you might want to contact the finance department at our local universitys business school and see if you can hire an MBA student as an intern. These students can often be very insightful, you know.”,Case 2,CASE 1: BIGGER ISNt A

28、LWAYS BETTER!,That is exactly what Andre did. Within a week he was able to recruit Juan Plexo, a second semester MBA student, who had an undergraduate degree in Accountancy and was interested in concentrating in Finance. When Juan started his internship, Andre explained exactly what his concerns wer

29、e. “Im going to have to raise funds for future growth, and given my recent profit situation, the prospects look pretty bleak. I cant seem to put my finger on the exact cause.,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,That is exactly what Andre did. Within a week he was able to recruit Juan Plexo, a

30、second semester MBA student, who had an undergraduate degree in Accountancy and was interested in concentrating in Finance. When Juan started his internship, Andre explained exactly what his concerns were. “Im going to have to raise funds for future growth, and given my recent profit situation, the

31、prospects look pretty bleak. I cant seem to put my finger on the exact cause.,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,The banks commercial loan committee is going to want some pretty convincing arguments as to why they should grant me the loan. I need to put some concrete remedial measures in plac

32、e, and was hoping that you can help sort out things, Juan,” said Andre. “I think I may have bitten off more than I can currently chew.”,Case 2,CASE 1: BIGGER ISNt ALWAYS BETTER!,The banks commercial loan committee is going to want some pretty convincing arguments as to why they should grant me the l

33、oan. I need to put some concrete remedial measures in place, and was hoping that you can help sort out things, Juan,” said Andre. “I think I may have bitten off more than I can currently chew.”,Case 2,Case Overview,Company has rapidly growth over the past five years Growth prospects had been good Ho

34、wever, No more funds available within the firms operations Suppliers could become concerned if the companys financial situation was known to them Owner needs financial assistance to solve the problem(s) Owner believes the firm needs external financing to fund more growth,Case 2,Answer the following

35、questions: Who is the decision maker in this case, and what is their position and responsibilities? What appears to be the issue (of concern, problem, challenge, or opportunity) and its significance for the organization? Why has the issue arisen and why is the decision maker involved now? When does

36、the decision maker have to decide, resolve, act or dispose of the issue? What is the urgency to the situation?,THE SHORT CYCLE PROCESS,Answer the following questions: Who is the decision maker in this case, and what is their position and responsibilities?,Step 1: The Short Cycle Process,Answer the f

37、ollowing questions: Who is the decision maker in this case, and what is their position and responsibilities? You are Juan the MBA student. Finance major with accounting background. Hired (as intern) to provide advice to the owner of the small business. The owner, Andre, will need to make a decision.

38、,Step 1: The Short Cycle Process,Answer the following questions: What appears to be the issue (of concern, problem, challenge, or opportunity) and its significance for the organization?,THE SHORT CYCLE PROCESS,Answer the following questions: What appears to be the issue (of concern, problem, challen

39、ge, or opportunity) and its significance for the organization? Firms available funds are used up; suppliers could become concerned about finances of the company; and there have been good growth prospects for the company; but might be difficult to get additional loans given the cash / debt / profitab

40、ility situation of the firm,THE SHORT CYCLE PROCESS,Answer the following questions: Why has the issue arisen and why is the decision maker involved now?,THE SHORT CYCLE PROCESS,Answer the following questions: Why has the issue arisen and why is the decision maker involved now? Issue has arisen becau

41、se funds are no longer available to maintain (and grow) the business, and the owner is concerned about the suppliers cutting him off if they know about the financial situation,THE SHORT CYCLE PROCESS,Answer the following questions: When does the decision maker have to decide, resolve, act or dispose

42、 of the issue? What is the urgency to the situation?,THE SHORT CYCLE PROCESS,Answer the following questions: When does the decision maker have to decide, resolve, act or dispose of the issue? What is the urgency to the situation? Owner would like to borrow funds soon because available funds are not

43、available to maintain (expand) the business. Not immediate but the situation with the suppliers / and other short-term debt obligations could become an issue within months. Now may be the time to come up with solutions.,THE SHORT CYCLE PROCESS,3.Take a look at the Financial Tables to see what number

44、s have been provided. 4.Review the case to see what areas are covered in more depth. 5.Review the case questions if they have been provided. This may give you some clues are what the main issues are to be resolved.,STEP 1: THE SHORT CYCLE PROCESS,CASE 2 Bigger Isnt Always Better!,CASE 2 Bigger Isnt

45、Always Better!,CASE 2 Bigger Isnt Always Better!,CASE 2 Bigger Isnt Always Better!,Is the firm in financial trouble? Is the firm going to run out of cash? Should the owner be concerned with the direction of the company?,Case 1,What is wrong with this company?,questions,1. How does Quickfixs average

46、compound growth rate in sales compare with its earnings growth rate over the past five years?,questions,2. Which statements should Juan refer to and which ones should he construct so as to develop a fair assessment of the firms financial condition? Explain why?,questions,3. What calculations should

47、Juan do in order to get a good grasp of what is going on with Quickfixs performance?,questions,4. Juan knows that he should compare Quickfixs condition with an appropriate benchmark. How should he go about obtaining the necessary comparison data?,questions,5. Besides comparison with the benchmark wh

48、at other types of analyses could Juan perform to comprehensively analyze the firms condition? Perform the suggested analyses and comment on your findings.,questions,6. Comment on Quickfixs liquidity, asset utilization, long-term solvency, and profitability ratios. What arguments would have to be mad

49、e to convince the bank that they should grant Quickfix the loan?,questions,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?,questions,8. What recommendations should Juan make for improvement, if any?,questions

50、,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?,STEP 2: THE LONG CYCLE PROCESS,Get a more in-depth analysis of the firm to pr

51、ovide recommendations to the owner,Step 2: The LONG Cycle Process,When you are doing the detailed reading of the case study, look for the following sections: 1.Opening paragraph: introduces the situation. 2.Background information: industry, organization, products, history, competition, financial inf

52、ormation, and anything else of significance. 3.Specific areas of interest: marketing, finance, operations, human resources, or integrated. 4.The specific problem or decision(s) to be made. 5.Alternatives open to the decision maker, which may or may not be stated in the case. 6.Conclusion: sets up th

53、e task, any constraints or limitations, and the urgency of the situation.,Step 2: The LONG Cycle Process,Opening paragraph: introduces the situation. Title: Bigger Isnt Always Better! Company has expanded but the profit situation has deteriorated.,Step 2: The LONG Cycle Process,Background informatio

54、n: industry, organization, products, history, competition, financial information, and anything else of significance. Open for the past 5 years Owner has lots of job experience but no financial experience Automobile parts business Lots of industry contacts Company financial situation deteriorated as

55、the company expanded,Step 2: The LONG Cycle Process,Specific areas of interest: marketing, finance, operations, human resources, or integrated. Owner has good connections with the industry No one specifically doing the finance Company is small business Business is based on reputation among suppliers

56、 and customers,Step 2: The LONG Cycle Process,The specific problem or decision(s) to be made. Cash situation has deteriorated over the past 5 years as the sales have increased Most of the available funds have been used up in the expansion Owner wants to access new funds by borrowing more money Owner

57、 concerned that his suppliers would quit supplying the parts if they knew the companys financial situation,Step 2: The LONG Cycle Process,Alternatives open to the decision maker, which may or may not be stated in the case. Try to obtain a short-term loan to meet funding requirements Restructure the

58、current finances Make the current assets more liquid, i.e., cash instead of accounts receivables and inventory Downsize the firm sell off the inventory and collect the receivables,Step 2: The LONG Cycle Process,Conclusion: sets up the task, any constraints or limitations, and the urgency of the situ

59、ation. Deal with the liquidity situation now only months to address the issue Any delays could jeopardize the supply chain and the business May not be able to obtain additional funds by borrowing,Step 2: The LONG Cycle Process,Analyzing the case should take the following steps: 1.Defining the issue(s) 2.Analyzing the case data 3.Generating alternatives 4.Selecting decision criteria 5.Analyzing and evaluating alternatives 6.Selecting the preferred alternative 7.Developing an action/implementation plan,Step 2: The LONG Cycle Process,Defining the issue(s)/Problem Statement 1.What appea