Mini-Case Study: Home Safety Inc.
In late 2002, Home Safety, Inc., a leading developer, marketer, and distributor of child safety products, was riding high. Since 1997, sales had increased from just $7.7 million to more than $70 million. Over the past three years, net income had more than doubled and the company’s stock price had nearly tripled from $12 per share to more than $32 per share. Michael Lowe, the CEO, exuded confidence, remarking, “We’ve only just begun to hit our stride. As we implement our new growth strategy into home securities products, there’s no telling how high sales or our stock price can go.”
Part from financial planning:
In your last conversation with Mr. Lowe, Mr. Lowe mused, “ you know, I remember back in 2000 when we had just 48 employees. I knew everyone and their family back then! Then in 2001, we added only 9 employees and, last year, why we hired 31! I love growth, but it sure makes it hard to keep up with everyone!” He then smiled and nodded his head. “ Better get to work on that forecast for next year. And, by the way, be sure to tell me what the sales growth rate has to be so that net income grows by 25 percent. I’d hate to lose my bonus check over a slight miss.”
You felt like you nearly had all the data you needed to put together the financial statement forecast for next year. The historical income statements and balance sheets are as follows. Finally, you figured that any short-term investments and cash equivalents would earn interest at 1.20 percent and the bank would charge the company 4.50 percent interest on the revolving credit facility. You took a deep breath, opened up your laptop and got to work.
Home Safety, Inc. Historical Income Statements
Income Statements (000) 2000 2001 2002
Net Sales $28,523 $43,030 $70,166
Cost of Sales $15,150 $24,231 $40,831
Gross Profit $13,373 18,799 29,335
General and administrative exp. $8,754 $10,452 $16,182
Advertising Expense 316 633 $1,267
Depreciation Expense 317 516 $1,128
Operating Income (loss) $3,986 $7,198 $10,758
Interest Income $160 $66 $153
Interest Expense $155 $206 $43
Other income, net ($187)
Pre- tax income $3,804 $7,058 $10,868
Income Taxes $1534 $2842 $4286
Net Income $2270 $4216 $6852
Dividends $0 0 0
Balance Sheets (000) 2001 2002
Cash and equivalents $973 $119
Short Term investment $1,138 $0
Accounts Receivable $7,790 $17,086
Inventories $7,328 $16,927
Other Current Assets $1,773 $3,263
Total Current Assets $19,002 $37,395
Gross property, plant and equipment $5,074 $11,041
Depreciation $1,181 $2,310
Net Property, plant & equipment $3,893 $8,731
Other non-current assets $1,602 $6,188
Total Assets $24,497 $52,314
Liabilities and shareholders' equity
Revolving credit facility $0 $0
Accounts payable $5,530 $7,992
Current portion of LT debt $0 $0
Other current liabilities $220 $1,279
Total current liabilities $5,750 $9,271
Long term debt $0 $0
Other non current liabilities $609 $1,195
Total liabilities $6,359 $10,466
Common Stock $15,561 $32,688
Retained earnings $2,577 $9,160
Total common equity $18,138 $41,848
Total Liabilities and Equity $24,497 $ 52,314