Bio-Pure Food Company
Gary Green has recently inherited some money and is interested in investing in a small company with some growth potential. Last week he ran into William White, and old friend from his college days and they had lunch together. In the course of the conversation, William mentioned that Bobby Brown, one of the stockholders a company that William is a shareholder in, has recently experienced some serious financial problems and is in need of cash. Bobby wants to sell his stock in the company (approximately 15% of the shares). Bio-Pure produces and markets barbecue sauces, ketchup, mayonnaise, mustard, and salad dressings made with all organically grown ingredients and absolutely no chemical additives. The products are distributed primarily through upscale retailers like Whole Foods Market and Trader Joe's. The company has grown rapidly over the last three years with a growth rate of 25% per year compared to the average growth rate of other firms in the industry of 10 - 12% a year over the same time period.
The balance sheet and income statement figures for the last three years are shown below, along with the industry ratios averages for the same time period. You are to assume that the annual economic growth rate has been between 3 and 4 percent for the period i.e., do not consider recent economic conditions.
Bio-Pure Food Company - Income Statements
|
|
2010
|
2011
|
2012
|
|
Sales (all sales are on credit)
|
2,400,000
|
3,000,000
|
3,750,000
|
|
Cost of goods sold
|
1,600,000
|
2,080,000
|
2,620,000
|
|
Gross Profit
|
800,000
|
920,000
|
1,130,000
|
|
Selling and administrative expenses1
|
479,800
|
548,000
|
609,400
|
|
Operating profit (EBIT)
|
320,200
|
372,000
|
520,600
|
|
Interest expense
|
70,000
|
90.000
|
170,000
|
|
Net income before taxes
|
250,200
|
282,000
|
350,600
|
|
Taxes
|
73,800
|
98,400
|
112,200
|
|
Net income
|
176,400
|
183,600
|
239,400
|
|
Shares outstanding
|
60,000
|
60,000
|
76,000
|
|
Earnings per share
|
2.94
|
3.06
|
3.15
|
Includes 195,000 in lease payments for each year
Bio-Pure Food Company - Balance Sheets
|
|
2010
|
2011
|
2012
|
|
Assets
|
|
|
|
|
Cash
|
60,000
|
80,000
|
60,000
|
|
Accounts Receivable
|
380,000
|
568,000
|
780,000
|
|
Inventory
|
460,000
|
522,000
|
580,000
|
|
Total Current Assets
|
900,000
|
1,170,000
|
1,420,000
|
|
Plant and equipment (net of depreciation)
|
1,300,000
|
1,530,000
|
2,780,000
|
|
Total Assets
|
2,200,000
|
2,700,000
|
4,200,000
|
|
|
|
|
|
|
Liabilities and Stockholder's Equity
|
|
|
|
|
Accounts payable
|
400,000
|
620,000
|
1,010,000
|
|
Accrued expenses
|
40,800
|
60,000
|
70,000
|
|
Total current liabilities
|
440,800
|
680,000
|
1,080,000
|
|
Long-term liabilities
|
650,000
|
727,200
|
1,407,800
|
|
Total liabilities
|
1,090,800
|
1,407,200
|
2,487,800
|
|
Common stock ($2 par value)
|
120,000
|
120,000
|
153,000
|
|
Capital paid in excess of par value
|
380,000
|
380,000
|
528,000
|
|
Retained earnings
|
609,200
|
792,800
|
1,032,200
|
|
Total stockholder's equity
|
1,109,200
|
1,292,800
|
1,712,200
|
|
Total liabilities and stockholder's equity
|
2,200,000
|
2,700,000
|
4,200,000
|
Industry Ratios
|
|
2010
|
2011
|
2012
|
|
Sales growth
|
--
|
10%
|
12%
|
|
Profit margin
|
7.71%
|
7.82%
|
7.90%
|
|
Return on assets
|
7.94%
|
8.86%
|
8.95%
|
|
Return on equity
|
14.31%
|
15.26%
|
15.85%
|
|
Receivables turnover
|
9.02X
|
8.86X
|
9.31X
|
|
Average collection period
|
39.9 days
|
40.6 days
|
38.7 days
|
|
Inventory turnover
|
4.24X
|
5.10X
|
5.11X
|
|
Fixed asset turnover
|
1.60X
|
1.64X
|
1.75X
|
|
Total asset turnover
|
1.05X
|
1.10X
|
1.12X
|
|
Current ratio
|
2.00X
|
2.25X
|
2.40X
|
|
Quick ratio
|
1.39X
|
1.41X
|
1.38X
|
|
Debt to total assets
|
43.20%
|
43.11%
|
44.10%
|
|
Times interest earned
|
6.50X
|
5.99X
|
6.61X
|
|
Fixed charge coverage
|
4.70X
|
4.69X
|
4.73X
|
|
Growth in earnings per share
|
--
|
9.95%%
|
12.82%%
|
Gary Green has asked you to do a complete analysis of the firm's financial condition and determine whether or not you think he should invest in this firm. The firm has not paid any cash dividends are there are no plans to do so in the foreseeable future. Thus, any returns an investor will earn must come from selling the stock in the future. Of course, Michael's primary interest is in the profitability of the firm but he has requested a thorough analysis to include ratios for each year and a comparison to the industry.
What comments will you make and what recommendations do you have for Gary Green ? Please keep in mind that he wants to see all of the "numbers".