Case analysis
Part one
Problem: Because of a large growth in its sales, the amount of money that Spencer needs to finance inventory and credit sales has increased. Most of the funds to satisfy this increase have come from a strategy of lengthening the time to pay suppliers. Thus trade discounts are missed, payables are high, liquidity is lower, the debt ratio is higher, and the missed discounts result in lower net profit margins.
Part two
Sources and Uses of Cash
A | B | ||||
1997 | 1998 | 1999 | 2000 | B - A | |
Cash | 72 | 66 | 50 | 32 | -40 |
Accounts Rec. | 804 | 1,248 | 1,796 | 2,560 | 1,756 |
Inventory | 396 | 612 | 896 | 1,278 | 882 |
Current assets | 1,272 | 1,926 | 2,742 | 3,870 | |
NFA | 114 | 126 | 132 | 154 | 40 |
Deferred Chgs | 24 | 30 | 44 | 60 | 36 |
Other Assets | 66 | 74 | 102 | 118 | 52 |
Total assets | 1,476 | 2,156 | 3,020 | 4,202 | |
Bank Loan | 48 | 76 | 80 | 118 | 70 |
Accts. Pay. | 492 | 1,010 | 1,740 | 2,746 | 2,254 |
Misc. Accr. | 48 | 110 | 160 | 200 | 152 |
Current liabilities | 588 | 1,196 | 1,980 | 3,064 | |
Capital Stock | 750 | 750 | 750 | 750 | 0 |
Ret. Earnings | 138 | 210 | 290 | 388 | 250 |
Liabilities and Equity | 1,476 | 2,156 | 3,020 | 4,202 |
Part three
Common-sized Income statement analysis
1997 1998 1999 2000 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 82.1% 83.1% 83.9% 84.0% Gross Profit 18.0% 16.9% 16.1% 16.0% Operating, Selling and Administrative Expense 13.8% 13.9% 13.8% 13.9% Interest Expense 0.1% 0.1% 0.1% 0.0% Purchase discounts taken -0.6% -0.7% -0.4% -0.2% Profit before taxes 4.7% 3.6% 2.6% 2.3% Income taxes 2.0% 1.6% 1.1% 1.0% Profit after taxes 2.7% 2.0% 1.5% 1.3% |
Part four
Ratio analysis
Ratio analysis SPENCER COMPANY | Calculation of Ratios | ||
1997 | 2000 | ||
Current ratio | |||
Current assts/current liabilities | 1272/588 | 2.16 | 1.26 |
Quick ratio | |||
(Curr. assets - Inv.)/ Curr. Lia. | (1272 - 396)/588 | 1.26 | 0.85 |
Total debt ratio | |||
Total debt/total assets... | |||