5014_ASS 1 # DRAFT 2* # ASSESSMENT 1 # Applied Managerial Finance # MBA # FLEXPAH CAPELLA

Assessment 1 Instructions: Financial Condition Analysis

Create a 6-8 page report that analyzes financial ratios for a selected company, uses the data to tell the financial story of that company, and concludes with a recommendation on whether the company would be a viable partner based on its financial condition.

Introduction

It is essential for financial advisors and upper management to know the financial condition of a company for a variety of reasons, including to improve its condition, to make decisions to increase shareholder value, and to know the true value of the entity. Such an analysis is important for any business, small, medium, or large.

This portfolio work project gives you a chance to apply the skills expected of an MBA graduate; from the financial management perspective, you should be able to: 

• Tell the financial story based on financial statements. 
• Conduct a financial analysis and identify focus areas for enhancing shareholder value.
• Interpret ratio computations that are meaningful and inform business decisions and strategies.

Scenario

Maria Gomez is founder and president of PacificCoast Technology, a small technology company. She is considering being bought out by a larger publicly traded company so she can be rewarded financially for all of her entrepreneurial efforts. She calls you into her office and says:

Thank you for meeting with me today. I’d like to talk to you about the future of the PacificCoast Technology. I’ve been running this company for a long time now, and I think it’s time for me to consider the next five to ten years. I want to find a buyer for this company who can take it to its full potential but with me still leading it. I still want to be a part of the journey, to see this company’s growth, which means this potential buyer needs to be a high quality company with solid financial health. That’s the only way we’ll be sure there’s going to be necessary funds and stability for the firm to grow. 

You are ready to take on this project to assist Maria with her vision to find a buyer to take the company into the next phase. At your desk, you review these additional meeting notes: 

• The acquiring company does not need to be in the same industry, as Maria values financial strength over any synergistic benefits.
• Maria wants you to select a company and then examine its financial condition by analyzing its financial statements and using financial ratio analysis. She indicated that using both trend analysis—going back at least three years—and industry average analysis would be helpful information for her. 
• From this analysis, Maria wants you to tell the financial story of the potential buyer/company by listing its financial strengths and weaknesses.
• She expects you to provide a list of actionable decisions so she can understand if the company would be a potentially viable corporate partner. 

Your Role

You are one of Maria’s high-performing managers at PacificCoast Technology, and she trusts your work and leadership. 

Requirements

After a few days of thinking about Maria’s project request, you call a meeting with her in which you lay out the requirements below. You tell her that by meeting these requirements, you believe she will have the information she needs. Maria approves your plan and asks that you get started right away. 

Here is what your report should provide for Maria on the selected company:

• Provide a brief background and summary of the potential corporate partner in terms of its history, product lines, and geographic reach. (Remember that Maria is looking for a partner that is a publicly traded firm.)
• Analyze the financial statements of the firm, which can be typically be found in the annual report in the investors’ area of the corporate website, including the income statement, balance sheet, and statement of cash flows:

  Do a comprehensive financial ratio analysis, including multiple financial ratios in each of the following categories—short-term solvency or liquidity, long-term solvency, asset management or turnover, profitability, and market value ratios.
  Use the following tools to analyze these ratios: trend analysis (going back at least three years) and industry average ratio analysis. If industry average ratios are not available for the company, use an average of two of its nearest competitors.

• Evaluate the financial statements and ratios of the firm to find its true condition and valuation. 

  From the ratio analysis, identify and strengths and weaknesses of the company.
  Make conclusions on the current status of the firm based on its history and comparison to its competitors.

• Make actionable items and conclusions, based on the data analysis, about the status of the company.

  Based on the analysis of the firm, identify any general actions that need to be made to improve the financial condition, and indicate the ease or difficulty of the firm doing so.

• Tell the current financial story of the firm and indicate the overall health of the firm as it relates to current valuation and the future prospects of the company. 

  Provide a clear picture of the financial condition and valuation of the company to shareholders, debtholders, customers, and employees. 
  Present information graphically and in narrative form, conveying a compelling snapshot of the company.
  Recommend whether the company would be a good match to enter into a buyout tender offer/agreement.
  Remember that it is not enough to just simply summarize numbers or data for your audience. Put yourself in their shoes and make the connections for them, tell them why it is important, and tap into their concerns and motivations. 

While you are free to use your creativity in formatting your submission, keep in mind that this is a document that will be for the eyes of the owner of the firm, so make sure it can be easily and quickly examined by a busy upper-management professional, with clear writing and understandable graphics and charts.

Deliverable Format

Create a report that tells the financial condition of a company. Your report should provide information on the following: 

Analysis of the financial statements.

Evaluation

of the true condition and valuation of the company.

Recommendation of actionable items for the company based on the financial analysis.

Report requirements:

• Ensure written communication is free of errors that detract from the overall message and quality.
• Use at least three scholarly resources. 
• Your report should be between 6 and 8 pages.
• Use 12 point, Times New Roman. 

If you are experienced with preparing professional reports, you may use a format of your choice. However, if you are new to this type of writing and document style, you may wish to use these sections as a way to organize your report:

• Title Page.
• Executive Summary.
• Company Background.
• Financial Analysis.

  Financial Ratio Analysis.
  Trend Analysis.
  Industry Average Analysis.

• Conclusion.
• Recommendations.
• Appendix (if you have additional data, reports, charts, et cetera, to support your analysis).

Related company standards:

• Remember that you are preparing a professional document meant for executive leadership with limited time. Your report should follow the corresponding MBA Academic and Professional Document Guidelines (available in the MBA Program Resources), including single-spaced paragraphs.
• Use APA-formatted references.

Evaluation

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria:

• Competency 1: Apply the theories, models, and practices of finance to the financial management of an organization.

  Analyze financial ratio analysis, trend analysis, and industry average analysis.

• Competency 3: Apply financial analyses to business planning and decision making.

  Evaluate the financial statements of the firm to find its true condition and valuation.

• Competency 4: Use data to support evidence-based financial decisions.

  Develop actionable items and conclusions, based on the analysis, about the status of the company.

• Competency 5: Communicate financial information with multiple stakeholders

  Tell the current financial story as to the overall health of the firm as it relates to current valuation and the future prospects of the company.

Faculty will use the scoring guide to review your deliverable from the perspective of Maria Gomez. Review the scoring guide prior to developing and submitting your assessment.

ePortfolio

This assessment demonstrates your ability to conduct a financial analysis. Include it in your personal ePortfolio. 

Note: Your faculty may also use the Writing Feedback Tool to provide feedback on your writing. In the tool, click the linked resources for helpful writing information.

Runninghead: Financial Conditions Analysis Toolscorp

1

Financial Conditions Analysis Toolscorp 14

Financial Conditions Analysis Toolscorp

hi

Dr.

Henry Weber

Capella University

08/17/2020

Financial Conditions Analysis Toolscorp

Executive summary

This paper intends to provide a set of financial reports, including

Income Statement

, Balance Sheet, and Cash Flow Statement of Hostess bands. An assumption about the dollar values to be budgeted is examined. The explanation of three classifications of ratios will include liquidity, solvency, and profitability. A display of calculations and statements will reflect a comprehensive understanding of the financial ratios of Toolscorp Company.

Company Background

Toolscorp is known for its leading production of lawn furniture, lawnmowers, microwaves, power tools, and ranges in the soils of the U.S. The company has been in operation for decades now, this has enabled the company to make massive sales across Canada and the U.S., The company, is well

–

known for its strong reputation in the production of power tools. Toolscorp has a reliable supply chain network that operates both in the local and international markets. Their large manufacturer based in the U.S. has enabled the company to expand its market across the globe. On the other hand, the policies adopted by the company has helped it to be in operation for long and gain more on its products.

Toolscorp has about 80% of its stores in the U.S. which makes it to strongly depend on the U.S. market for all its revenue. This is approximately 75% of the income generated. Toolscorp does not leverage its online channel and social media to promote the company in order to attract new customers. This is quite significant to the growth of the company. However, the company has not invested mainly in the international market. The company has no discount or reward program to get the attention of the (Kingsnorth, 2019).

The demand for power tools is said to increase at a rate of 5% in the next 5 years. This increasingly high demand will continuously improve the company values and market share (Olson, et al 2018). Nevertheless, the company can diversify into a new market and reduce its dependence in the U.S market. This will benefit the company in terms of revenue stream and reduce the company’s risk of sales and profits. However, if the company can invest in its online share, it can generate more profits and market share (Chaffey, & Ellis-Chadwick, 2019).

As the company looks to expand globally, they are faced with some challenges such as shortage of skilled workers, government regulations, and language barriers in a particular global market that can threaten the steady growth of profits for ToolsCorp. The cost of labor in the U.S. and Canada is increasing and, therefore, will reduce the profit margin of Toolscorp. Nonetheless, the company faces competition from various companies entering the power tools business. This has an intern led to fewer profit margins.

Financial analysis

As I review the business growth, I keep in mind the organization’s ability to generate profits, as opposed to the past revenue to see if long-term obligations can be met. Understanding the percentage of the increase reflects profitability enough to retain financing. Toolscorp positive numbers and consistent improvements in profits secure the company’s ability to generate positive market expectations and financial stability.

The actions of productivity are profit margin, profit on an asset, and appearance on equity. In the figure above, there are calculations of current ratio, profit margin, and after-tax ROE for Toolscorp. Profit margin refers to the proportion of the total revenue that an organization has earned out of total income received. It is the most essential concept as each organization; apart from non-profits, the primary objective is to make a profit. Profit margin is computed to know the percent of each dollar value of sales from the net income. A higher profit margin gives a higher return to stockholders. The profit margin is designed by separating Sales by Net Income. ROE is obtained by dividing Net Income by total Stockholders’ Equity. (Gibbons, Hisrich, and DeSilva, 2015).

(Toolscorp Annual Report)

“Balance Sheet

All numbers in thousands

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13

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1,318

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-622,130

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Period Ending		12/31/2017		12/31/2016		12/31/2015		12/31/2014
Current Assets
Cash and Cash Equivalents	13 5,701	26,855	64,473																																																																																												–
Short Term Investments
Net Receivables	101,012	89,237	68,518
Inventory	34,345	30,444	25,130
Other Current Assets	4,655
Total Current Assets	279,028	151,363	168,817				–
Long Term Investments	2,900
Property Plant and Equipment	174,121	153,224	128,078
Goodwill	579,446	588,460	56,992
Intangible Assets	1,930,388	1,954,343	270,079
Accumulated Amortization
Other Assets	392	502	19,563
Deferred Long Term Asset Charges
Total Assets	2,966,275	2,847,892	643,529
Current Liabilities
Accounts Payable	49,992	34,083	28,053
Short/Current Long-Term Debt	11,268	11,496	9,250
Other Current Liabilities	54,810	37,793	36,197
Total Current Liabilities	127,851	103,926	92,758
Long Term Debt	987,920	993,374	1,193,667
Other Liabilities	377,931	519,181	17,225
Deferred Long Term Liability Charges	1,696
	Minority Interest		342,240		334,192			-37,991
Negative Goodwill
Total Liabilities	1,493,702	1,616,481	1,303,650
Stockholders’ Equity
Misc. Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock		13		-622,130
Retained Earnings	208,279	-15,618
Treasury Stock		1,318
Capital Surplus	920,723	912,824
Other Stockholder Equity
Total Stockholder Equity	1,130,333	897,219
Net Tangible Assets	-1,379,501	-1,645,584	-949,201

Figure 1.3

Income Statement
All numbers in thousands

12/31/2017

12/31/2016

12/31/2015

12/31/2014

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186,629

190,609

162,790

137,858

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Minority Interest

342,240

334,192

-37,991

-37,991

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Net Income

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223,897

84,253

77,197

Revenue
Total Revenue	776,188	727,586	620,815	554,695
Cost of Revenue	449,290	413,429	358,612	320,763
Gross Profit	326,898	314,157	262,203	233,932
Operating Expenses
Research Development
Selling General and Administrative	116,033	114,850	94,256	90,983
Non-Recurring
Others	381	3,591	4,306	4,468
Total Operating Expenses	589,559	536,977	458,025	416,837
Operating Income or Loss		186,629		190,609		162,790		137,858
Revenue/Income from Continuing Operations
Total Other Income/Expenses Net	4,275	-145,992	-74,030	-56,394
Earnings Before Interest and Taxes
Interest Expense	-39,174	-67,033	-50,011	-37,447
Income Before Tax	190,904	44,617	88,760	81,464
Income Tax Expense	-67,204	-7,323
Net Revenue/Income from Continuing Ops	258,108	51,940	88,760	81,464
Non-recurringgEvents
Discontinued Operations
Extraordinary Items
Effect of Accounting Changes
Other Items
	Net Income
	223,897	52,807		84,253		77,197
Preferred Stock And Other Adjustments
Net Income Applicable to Common Shares	-4,404
“(YahooFinance.com)

The success of a business is measured using a profit and loss statement for that financial period. The better the profit and loss statement appear, it means there is more money coming in the business, the more appealing the business is to investors. This will show how the business is doing to directors, and it allows them to evaluate their own performance for the year and decide what they can do to improve company performance next year.

Financial ratio analysis

Liquidity

Quick and easy availability of cash is necessary for any business in order to pay off its obligations on time. These obligations can be any expense to keep the business running, such as financial debt, employee’s salaries, suppliers, marketing expenses, etc. The business’s ability to settle its debt can also be measured by its liquidity ratios – expressed by the relation between its assets and liabilities. The higher the rate, the higher the ability of a company to be solvent, and therefore financially stable. 

ToolsCorp has seen the relationship between its assets and liabilities deteriorate over the years since 2016. Its current ratio went from roughly 4.0 in 2016 to 2.18 in 2018. It means that for every dollar in debt/liability, ToolsCorp had $5 in cash (or other goods easily convertible to cash) to honor these obligations in 2016. This capacity was reduced by almost 37% in 2018, representing an increase in its liabilities not followed by the company’s assets growth.

A higher indebtedness rate can be understood as a risk to creditors, as the risk of insolvency increases when a business has limited (or none) availability to cash to pay its debts and fulfill its obligations. That seems to be the case of ToolsCorp, especially when it comes to its cash ratio – the relationship between its more liquid current assets (such as cash and temporary investments) and its current liabilities – calculated as 0.09 in 2018, deeply below industry benchmarks settled in 0.5.

Asset-management ratios

ToolsCorp was able to bring their average collection period down from seventy-three days in 2016 to seventy days in 2017, and they kept it consistent through to 2018. It isn’t a massive decrease, but it’s an improvement, nonetheless. If they were able to bring it down to sixty days, like the rest of the industry, they would reduce their accounts receivable to $308.00. 

By adopting the Just-In-Time inventory, practice ToolsCorp was able to reduce their inventory levels, which sped up their cash conversion cycle. In 2016 their cash conversion cycle was 168 days, and by 2017 they were able to bring it down to 143 days. Their work-in-process and finished goods inventory turnover days improved, going from 7 days for work-in-process, to 3 days by 2018, and finished goods turnover went from 71 days in 2016 to 44 days by 2018. It appears that they were able to turn over inventory faster than the industry, meaning the company is spending less on holding costs. If the company can continue to keep its inventory turnover days under the industry ratios, it can start to generate more money by having more output per day. 

ToolsCorp took a hit on their fixed asset turnover ratio, bringing them below the industry when they invested in their new automatic feeders, packaging equipment, computers, and computer software plus the construction of their new warehouse. Their fixed asset turnover went from 4.61 in 2016 down to 2.82 in 2018, which is understandable because they invested highly in their company to try to compete with the rest of the industry and reduce labor costs. 

ToolsCorp was below the industry for total assets in 2016 with a ratio of 1.41 then down to 1.32 in 2018, meaning that the company produces $1.32 of revenue for every dollar that’s invested in total assets. 

Profitability

The profitability ratios deal with a business’s ability to generate profit. These ratios are critical to look at a business’s financial position. ToolsCorp’s calculation of its profitability ratios is very comparable to the industry except for 2018. For example, the return on equity for 2018 was 0.1%; this means that for every dollar invested, only 0.1 cents is earned by the shareholders. This is compared to their return on equity in 2016 at 21.76% and 2017 at 13.79%. ToolsCorp will have a hard time finding investors in the future. 

Net profit margin is one of the most critical factors in calculating a company’s financial health. In 2016, ToolsCorp was right below the industry average at 8.99%, but by 2018 had dropped to 0.04%. This means that the company is not controlling their overhead or operating costs. 

The return on assets ratio is also a good indicator of a company’s profitability. This ratio shows how much a company’s assets generate a profit. In 2016, ToolsCorp had a return on assets of 12.70%; in 2017, it was 8.01%, and in 2018 was 0.06%. Every year ToolsCorp was well below the industry average of 17%. 

Trend analysis

Using the profitability ratios, we can see that ToolsCorp profitability is declining rapidly. Specifically, their net profit margin dropped 8.95% over two years, showing a considerable loss in profit and performance. Based on the industry averages, ToolsCorp should be more profitable than it currently is and needs to review its current costs and sales.

Based on these calculations, it is safe to say that Toolscorp has seen its capacity to pay off its debt/obligations deteriorate over the years, mostly because of an increase in its expenses, perhaps due to the acquisition of capital goods (land, plant, and equipment) from 2016 to 2018, and its consequent maintenance expenses, clearly not followed by an increase in its revenues. However, ToolsCorp numbers are slightly below the ones observed in the industry that alone does not necessarily mean that the company will be insolvent or cannot be profitable and successful.

Based on the analysis, the trend analysis will allow Maria to foresee her business monthly turnovers and expenses. This could be important for her business when applying for things like loans and help from Toolscorp and other investors. What she also has to consider is whether some months may be full of activity than others in order to make more money.

Industry Average Analysis

Debt coverage deals with a business’s ability to pay its finance costs and principals each month. The more debt a business has, the more highly leveraged it is. The long-term debt to total capitalization ratio can help a business understand their debt coverage. ToolsCorp was 32% in 2016, 33% in 2017 and 38% in 2018. When a business has a high ratio compared to the industry, this explains that the business uses debt as its main source of financing. The industry ratio is 35%; ToolsCorp is in comparison to the industry and therefore uses an acceptable amount of debt as financing. 

When looking at ToolsCorp financial position as a whole, it is essential to look at debt. If the company is ever seeking to expand or buy new equipment, creditors will look for how much a business uses debt. If a business’s liability is too high, then the creditors are taking on higher risk in the investment. ToolsCorp is currently sitting close to the industry standard in terms of debt and, therefore, wouldn’t be too high of a risk for creditors. If they were looking to borrow a large sum, then they may want to raise more equity capital first to make sure they weren’t using debt as a primary source of financing. 

Conclusion

An assumption about the dollar values was examined. An explanation of three classifications of ratios included liquidity, solvency, and profitability of ToolsCorp publicly-traded company data was used to compare the ratios in the annual financial report. The conclusion is that ToolsCorp continues to show growth and strong cash flow for future ventures to increase future revenues. ToolsCorp positive numbers and consistent increases in profits secure the company’s ability to generate positive market expectations and financial stability. It is important to note, however, that ToolsCorp liabilities are significantly low. Overall the company is financially sound.

Recommendation

It has been only a few years since the company made these investments, so if they continue to turn over their inventories at the same rate, or a faster rate than the rest of the competition, they may be able to keep their 60% of the market share or possibly take more of the stock back. In 2017 and 2018, and they were able to get cash flowing throughout the company faster due to the inventory turnover. They should also be able to bring their labor costs down, but until they start to raise more capital. Therefore, I recommend Maria to use ToolsCorp as a buyer. The company will be of great benefit to Maria’s company as ToolsCorp will be able to finance her business.

I expect Maria’s business to be performing well, and I feel that this is convincing based on the market research that I have done for the industry. This is likely to happen if not exceed my prediction. What this will mean for her business is that in the first year of trading, it will make a steady profit in order to be able to call it a success. In the second year of trading, I have predicted a rise in prices for the business stock and overheads; however, because I have removed the high start-up costs which are associated with starting a business, it will allow her business to make a very healthy profit.

Reference

Chaffey, D., & Ellis-Chadwick, F. (2019). Digital marketing. Pearson UK.

Kingsnorth, S. (2019). Digital marketing strategy: an integrated approach to online marketing. Kogan page publishers.

Olson, E.M., Slater, S, F., Hult, G. T. M., & Olison, K. M (2018). The application of human resource management policies within the marketing organization: The impact on business and marketing strategy implementation. Industrial Marketing Management, 69, 62-73.