Computing liquidity-asset management-leverage ratios

Attach case presents a small manufacturer of sporting goods. A concise outline of the firm and its industry is given, and a few tips for your attention. You are given three years’ worth of income statements and balance sheets to inspect.

You are a financial analyst working for the investment firm. This manufacturer has asked for your firm’s assist in raising capital for the forthcoming season’s production requirements. It is your job to analyse the financial statements and comment to investment brokers on this firm’s present financial situation. It is late July, and the firm’s financial statements (representing fiscal year end June 30) have just been released.

For this project you should reconstruct the attached financial statements on separate worksheets in an Excel workbook. Then, on one more worksheet, you should create formulas to compute the financial ratios that can be derived from the given financial statements. These ratios are to be computed using formulas in the cells that are linked to the other worksheets: no credit will be given if the ratios are calculated by hand and entered into the cells. You must determine which ratios can be computed with the detail given, based on the ratios given in your textbook. There is sufficient data for you to compute liquidity, asset management, leverage, as well as profitability ratios. You must compute the Du Pont ratio analysis separately. All three years’ worth of ratios should be computed, and must be presented in chronological order for you to do trend analysis.

Next, you should write a paper discussing the findings of your ratio analysis. You should include not only the present situation, but also how the ratios have changed over the precedent three years (trend analysis). Any recommendations you can make as to what the firm can do to correct any problem areas would make you look better in the eyes of your superiors.

Outdoor Sports, Inc.

Outdoor Sports, Inc. is a manufacturer of wind surfers, surfboards, and related equipment. The company was started by two surfers tinkering in their garage with surfboards of their individual design. The company has grown speedily, cashing in on the growing popularity of wind surfing.

Outdoor Sports’ business is highly cyclical. Inventory is built up throughout the late fall and winter months, and the majority of sales are booked and delivered to distributors throughout the early spring. Competition between the many manufacturers of this easily made product line is intense.

Small manufacturers like Outdoor Sports are under great pressure from main sports equipment makers, who have substantial promotional resources at their disposal, and complementary products, countercyclical to the sale of surfing equipment. Brand recognition is a significant selling point in this competitive business, achieved at considerable expenditure through sport personality endorsements and other promotional campaigns.

What to anticipate from Outdoor Sports’ financials depends on when they are examined throughout the fiscal year. At June 30, the company’s fiscal year-end, the financials must look most favourable. Receivables, inventory, payables, and working capital borrowings must be at seasonal lows. The firm must be cash rich, as it is about to gear up for the next season’s production run. Property, plant and equipment must be at some significant level commensurate with the company’s manufacturing demands, supported by equity and long-term debt.

Sales margins bear close watching. Pricing pressures caused by the intense competition can erode them to dangerously low levels. Given the seasonality of the business, there might be a cash flow crunch throughout the winter months. Entire, cash flow might be a problem if the business is still growing speedily, and requires outside financial resources to do so.

The potential of overproducing throughout the winter period for a spring sales period that fails to live up to management’s anticipations is also a significant risk.

 OUTDOOR SPORTS, INC. Balance Sheet (\$000s) June 30, 2011 2009 2010 2011 ASSETS Current Assets Cash 182 25 30 Accounts Receivable 338 391 349 Inventory 283 831 1,207 Prepaid Expenses 63 33 11 Other Current Assets 11 8 3 Total Current Assets 877 1,287 1,601 Propert, Plant & Equipment Land, Buildings & Equipment 842 842 941 Less Accumulated Depreciation 179 226 286 Net land, Buildings & Equipment 663 616 655 Total Assets \$   1,540 \$   1,903 \$   2,255 LIABILITIES Accounts Payable, Trade 129 283 347 Accounts Payable, Other 80 52 61 Accrued Expenses 0 0 0 Short-Term Debt 184 413 745 Income Tax Payable 61 0 0 Total Current Liabilities 454 748 1,152 Long-Term Debt 578 682 869 Total Liabilities 1,031 1,430 2,021 Stockholders' Equity Capital Stock 275 275 275 Retained Earnings 234 198 (41) Total Stockholders' Equity 509 473 234 Total Liabilities and Equity \$   1,540 \$   1,903 \$   2,255

 Outdoor Sports, Inc. Income Statement (\$000s) June 30, 2011 2009 2010 2011 Sales 2,519 4,914 6,185 Cost of Goods Sold 1,460 2,899 4,172 Gross Income 1,059 2,016 2,013 Operating Expenses 732 1,898 2,060 Depreciation Expense 30 47 61 Operating Income (EBIT) 297 72 (107) Interest Expense 72 107 132 Income Tax Expense 90 0 0 Other Expense 47 0 0 Net Income \$      89 \$     (36) \$    (239)