Cranston Dispensers Income Statement ($ in thousands) Account 2014 2013 2012 Sal
ID: 2738564 • Letter: C
Question
Cranston Dispensers
Income Statement
($ in thousands)
Account
2014
2013
2012
Sales
3,784
3,202
2,760
Cost of Goods Sold
2,568
2,172
1,856
Gross Profit
1,216
1,030
904
Selling & Administrative
550
478
406
Depreciation
247
230
200
Earnings Before Interest and Taxes
419
322
298
Interest Expense
20.50
24.70
14.30
Taxable Income
398.50
297.30
283.70
Taxes
119.55
89.19
85.11
Net Income
278.95
208.11
198.59
Balance Sheet
($ in thousands)
Account
20x5
20x4
20x3
Current Assets
Cash
341
276
236
Accounts Receivable
722
642
320
Inventory
595
512
388
Total Current Assets
1,658
1,430
944
Net Fixed Assets
1,822
1,691
1,572
Total Assets
3,480
3,121
2,516
Current Liabilities
Accounts Payable
332
288
204
Accrued Expenses
343
335
192
Short-term Notes
503
491
243
Total Current Liabilities
1,178
1,114
639
Long-term Debt
398
324
289
Other Long-term Liabilities
239
154
147
Total Liabilities
1,815
1,592
1,075
Owners’ Equity
Common Equity
1,665
1,529
1,441
Total Liabilities & Equity
3,480
3,121
2,516
Additional information:
2014
2013
2012
Stock price per share
33$
38$
32$
Dividend stock share
$1.00
0.84$
0.70$
Shares outstanding
143
143
143
2014
2013
2012
Industry Averages 2014
Liquidity Ratios
Current ratio
1.28
1.48
2.10
Quick ratio or acid ratio test
0.82
0.87
1.10
Cash Ratio
.25
.37
.39
Financial leverage ratios
Debt ratio
.51
.42
Time interest earned ratio
13.04
20.84
19.00
Cash coverage ratio
22.35
34.83
35.00
Asset management ratios
Inventory turnover
4.24
4.78
5.20
Days sales in inventory
86.04
76.30
70.19
Receivables turnover
4.99
8.63
6.81
Days sales in receivables
73.18
42.32
53.60
Total asset turnover
1.03
1.10
1.80
Profatibility margins
Profit margin
6.5%
7.2%
8.6%
Return on total assets
6.67%
7.89%
15.48%
Return on equity
13.61%
13.78%
20.59%
Market value ratios
Earnings per share
1.46
1.39
Not meaningful
Price earnings ratio
26.11
23.04
21.00
Earnings growth rate
4.79%
17.45%
18.00%
PEG ratio
5.45
1.32
1.17
Book value
$10.69
$10.08
Not meaningful
Merket to book value ratio
3.55
3.18
4.26
1. Following are cranston’s common size income statements and balance sheets for 2013 and 2012. Prepare a common-size income statement and balance sheet for 2014.
2. Complete the 2014 table of financial ratios for Cranston
3. Use the common size statements and the ratio analysis tat you have prepared to comment on cranston’s
a. liquidity
b. solvency
c. asset management
d. profitability
e. market performance.
Indicate whether they are better or worse than the 2014 averages
4. Express cranston’s ROE in terms of the DuPont identity. Which ratios are contributing to Cranston’s below average ROE?
5. Based on your analyses in questions 1 through 4, why do you think cranston’s recent stock performance has been disappointing?
Account
2014
2013
2012
Sales
3,784
3,202
2,760
Cost of Goods Sold
2,568
2,172
1,856
Gross Profit
1,216
1,030
904
Selling & Administrative
550
478
406
Depreciation
247
230
200
Earnings Before Interest and Taxes
419
322
298
Interest Expense
20.50
24.70
14.30
Taxable Income
398.50
297.30
283.70
Taxes
119.55
89.19
85.11
Net Income
278.95
208.11
198.59
Explanation / Answer
1) Common size income statement Account 2014 2013 2012 Sales 100.0% 100.0% 100.0% Cost of Goods Sold 67.9% 67.8% 67.2% Gross Profit 32.1% 32.2% 32.8% Selling & Administrative 14.5% 14.9% 14.7% Depreciation 6.5% 7.2% 7.2% Earnings Before Interest and Taxes 11.1% 10.1% 10.8% Interest Expense 0.5% 0.8% 0.5% Taxable Income 10.5% 9.3% 10.3% Taxes 3.2% 2.8% 3.1% Net Income 7.4% 6.5% 7.2% Balance sheet Account 20x5 20x4 20x3 Current Assets Cash 9.8% 8.8% 9.4% Accounts Receivable 20.7% 20.6% 12.7% Inventory 17.1% 16.4% 15.4% Total Current Assets 47.6% 45.8% 37.5% Net Fixed Assets 52.4% 54.2% 62.5% Total Assets 100.0% 100.0% 100.0% Current Liabilities Accounts Payable 18.3% 18.1% 19.0% Accrued Expenses 18.9% 21.0% 17.9% Short-term Notes 27.7% 30.8% 22.6% Total Current Liabilities 64.9% 70.0% 59.4% Long-term Debt 21.9% 20.4% 26.9% Other Long-term Liabilities 13.2% 9.7% 13.7% Total Liabilities 100.0% 100.0% 100.0% Owners’ Equity Common Equity 47.8% 49.0% 57.3% Total Liabilities & Equity 100.0% 100.0% 100.0% 2) 2014 2013 2012 Industry Averages 2014 Liquidity Ratios Current ratio 1.41 1.28 1.48 2.1 Quick ratio or acid ratio test 2.45 0.82 0.87 1.1 Cash Ratio 0.21 0.25 0.37 0.39 Financial leverage ratios Debt ratio 0.52 0.51 0.42 Time interest earned ratio 20.44 13.04 20.84 19 Cash coverage ratio 32.49 22.35 34.83 35 Asset management ratios Inventory turnover 4.32 4.24 4.78 5.2 Days sales in inventory 84.57 86.04 76.3 70.19 Receivables turnover 5.24 4.99 8.63 6.81 Days sales in receivables 69.64 73.18 42.32 53.6 Total asset turnover 1.09 1.03 1.1 1.8 Profatibility margins Profit margin 7.37% 6.50% 7.20% 8.60% Return on total assets 8.02% 6.67% 7.89% 15.48% Return on equity 16.75% 13.61% 13.78% 20.59% Market value ratios Earnings per share 1.95 1.46 1.39 Not meaningful Price earnings ratio 16.92 26.11 23.04 21 Earnings growth rate 34% 4.79% 17.45% 18.00% PEG ratio 8.68 5.45 1.32 1.17 Book value 11.64 $10.69 $10.08 Not meaningful Merket to book value ratio 2.83 3.55 3.18 4.26 3) a)Cranston’s liquidity ratios are all below the industry average and either stable or declining. Low liquidity ratios can indicate either an aggressive pursuit of efficiency where the company attempts to achieve results with a minimum investment in current assets or it may indicated higher than average current liabilities. The asset management ratios suggest a somewhat inefficient use of current assets, so the latter explanation is more likely. b) The total debt ratio indicates a slightly higher than average use of debt financing and the rising trend suggests increasing reliance on debt financing. On the other hand, the 2014 Times Interest Earned ratio is above average, suggesting that Cranston can easily handle its interest payments. The Cash Coverage ratio is below the industry average, but still high. It indicates that Cranston has $32.49 of EBITDA for every dollar of interest expense, so risk of financial distress is low. c. asset management Inventory turnover and receivables turnover are both lower than the industry average, indicating that Cranston is using its current assets inefficiently. The days sales in inventory and receivables merely convert turnovers into days and are just a different way of looking at the same information. Total asset turnover is stable, but well below the industry average, most likely because of the inefficiencies noted in the use of current assets. d) profitability Cranston’s profitability measures are stable, and even improving slightly, but remain below the industry averages. The increase in Return on Equity is largely due to an increasing Total Debt ratio. e) market performance Cranston’s market performance shows that the market measures results against expectations. Even though earnings grew investors apparently do not believe that this rate is sustainable. Averaged over the 3 years, Cranston’s growth rate in earnings is just about average for the industry. The Price/Earnings, PEG, and Market to Book ratios are all below the industry averages suggesting that investors are no longer optimistic about Cranston’s future. These averages also indicate, however, that Cranston stock may be attractively priced. 4) By substituting ratios for raw numbers, we can express the Dupont Identity as Profit Margin × Total Asset Turnover × Total Assets/Total Equity = Return on Equity. For the industry average, we get 8.60% × 1.80 × (1/(1-.25) =20.59% and for Cranston 7.37% × 1.09 x(1/(1-.52) = 16.75%. The DuPont equation clearly shows that Cranston’s below average Return on Assets is caused first by an inefficient use of assets and second by below average profit margins. Cranston makes up for, or perhaps masks, these shortcomings by using more debt than the average company in its industry. 5) Many firms experiencing rapid growth in sales and earnings tend to focus on marketing and expanding production while becoming careless about efficiency and financial management. When sales growth slows to more normal levels, these inefficiencies can no longer be ignored and the firm must deal with them. Cranston has allowed inventories to exceed the industry average, is slower than average in collecting its bills, and seems to have some excess capacity in fixed assets. Investors also consider a great deal of information that may not be available simply by analyzing financial statements, but the statements do reveal a company that seems to be maturing in terms of growth and must now find other ways to maintain the value of its stock