Case Study 1: Bigger isn’t always Better

Submitted to:
Mr. Felix D. Cena

Submitted by:
Demetillo, Angel Marie
Emnace, Cheveem Grace C.
Juen, Danica P.
C07

October 15,2020
1. How does Quickfix’s average compound growth rate in sales compare with its earnings
growth rate over the past five years?
Average Compound Growth Rate in Sales
CAGR in Sales = (Ending Value/Beginning Value) ^ (1 - # of years) – 1
CAGR in Sales = ($1,013,376/$600,000) ^ (1-5) – 1
CAGR in Sales = 0.1105
Average Compound Growth Rate = CAGR
# of Years
Average Compound Growth Rate = 0.1105
5
Average Compound Growth Rate = 2.21%

Earnings Growth Rate = Net Income/Sale

2000 2001 2002 2003 2004

Net Income $16,634 $22,859 $2,126 ($16,435) ($102)

Net Sales $600,000 $655,000 $780,000 $873,600 $1,013,376

Earnings Growth 2.77% 3.49% 0.27% (1.88%) (0.01%)

Rate

Average Earnings Growth Rate = Sum of Earnings Growth Rate

5
Average Earnings Growth Rate = 4.64%
5
Average Earnings Growth Rate = 0.93%

To calculate the average compound growth rate, we calculated the compound annual
growth rate in sales which is 11.05% using the formula, CAGR in Sales = (Ending
Value/Beginning Value) ^ (1 - # of years) – 1, and then divided the answer by the number of
years which is 5 years and then we arrived at the average compound growth rate which is
2.21%. As for the average earnings growth rate, we calculated each year’s earnings growth
rate using the formula, Earnings Growth Rate = Net Income/Sale, and then added all the
answers of the 5 years and divided it by 5 to get its average earnings growth rate which is
0.93%
At their most basic level, growth rates are used to express the annual change in a variable
as a percentage. The compound annual growth rate in sales shows that the average growth
sales is low in the span of 5 years at 2.21% and its earnings growth rate is even lower at
0.93%. This only proves that the current standing of the business is nowhere near good,
current investors will be disappointed by the earnings per share and future investors will not
be interested in the company. Considering that the earnings growth rate is low, the firm
 should reduce its cost to generate more income. Overall, these rates indicate that
management performance must be improved.

2. Which statements should Juan refer to and which one’s should he construct so as to
develop a fair assessment of the firm’s financial condition? Explain why?

Juan should refer to the financial statements available that has the data of the company’s
performance in three to five year period and use it to comprehend and analyze the operation of
the business. Juan should construct a common size income statement and common size balance
sheet, for him to have easy way to study the changes in percentage in the financial statements.
Moreover, these will help him in assessing and understanding the vital trends of the sales and its
sources, expenses, assets and liabilities. It is also easier for him to compare the financial
statements for the past years since percentage of increase or decrease of each individual
component of cost, assets, liabilities, and so on are available and he can easily ascertain his
required ratio. Accordingly, this analysis will help him to realize what factors drive down the
business’ financial performance over time, through this he can also assess and plan these changes
to foresee the future performance if the business. Making Cash Flow statement is also a big help
for Juan, by making this, he can trace the activities that affects the inflow and outflow of cash.
To sum it up, Juan should make use of all the given data and make analysis considering the
particular figures that affect the company’s financial performance over the years and to develop a
fair assessment of the firm’s financial condition.
Figure 1.1 Cash Flow Statement for the current year:
Quickfix Autoparts
Cash Flow Statement

Cash flow from Operating Activities

Net Income ($102)
Adjustments to Reconcile:
Increase in Accounts Receivable ($12,424)
Increase in Merchandise Inventory (40,000)
Increase in Accumulated Depreciation 50,000
Increase in Accounts Payable 800
Increase in Accruals 2,325 701
Net Cash Flow from Operating Activities $599

Cash Flow from Financing Activities

Decrease in Long Term Debt -$11,000
Net Cash Flow from Financing Activities -$11,000

Total Cash Flow Increase/(Decrease) ($10,401)

Cash Balance,2003 $28,826

 Cash Balance, 2004 $18,425

Figure 1.1 shows the Cash Flow for the current year, this can help Juan to analyze the
firm’s performance. The statement projects the operating, investing, and financing activities of
the business for a certain period. This year’s cash flow does not have investing activities, that
means that the business did not invest on something maybe because their fixed assets from last
year is still in good condition, and that is a good sign for the business.

4. Juan knows that he should compare Quickfix’s condition with an appropriate

benchmark. How should he go about obtaining the necessary comparison data?
There’s a lot of ways Juan could use in order to obtain necessary comparison data that he
need to compare with the the Quickfix’s data. This could help him discover the best performance
their company could achieve, and identify the problems regarding the processes of their
organization and solve these problems.
Firstly, Juan could use the time trend analysis for him to draw conclusions about the effect of
the trend the company is following. In time trend analysis, Juan could compare the past years
data that would help him assess the company’s condition whether it is likely to improve or
decline.
Secondly, Juan could use the peer group analysis wherein he could identify companies that
operate in similar ways as them and compare their financial ratios and financial statements. Juan
should collect industry average key financial ratios of different companies that he could use in
comparing with their company’s data. In addition, Juan could also find the information he needs
in the internet and analyze these information that would help him in decision making. Through
this, Juan could evaluate the performance of their company and compare it to similar businesses
in their industry and finally, he will know where their company should stand.
Lastly, Juan could use Standard Industrial Classification codes, which are 4-digits code used
for classifying industries. This could help Juan consolidate information across multiple sources
easily. These classification codes can be used for tracking various industries, identifying
potential customers, and comparing one business to other businesses.

5. Besides comparison with the benchmark what other types of analyses could Juan
perform to comprehensively analyze the firm’s condition? Perform the suggested analyses
and comment on your findings.
As what we have suggested to Juan, besides benchmarking, he could use the common
size income statement and balance sheet to easily understand the significant changes in
percentage on the financial performance of the business. In addition, DuPont analysis could also
help Juan to comprehensively analyze the firm’s condition,since it expounds the ROE,which is
one of the key factors in the firm’s performance.

Figure 2.1
Quickfix Autoparts
Income Statement

2000 2001 2002 2003 2004

Net Sales 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Goods Sold 80.00% 82.00% 84.00% 85.00% 85.00%
Gross Profit 20.00% 18.00% 16.00% 15.00% 15.00%

Administrative and Selling 5.00% 2.34% 2.16% 5.00% 4.00%

Expense
Depreciation 4.17% 3.82% 6.41% 5.72% 4.93%
Miscellaneous Expense 0.34% 0.54% 0.73% 2.00% 1.50%
Total Operating 9.50% 6.70% 9.31% 12.72% 10.43%
Expenses
EBIT 10.50% 11.30% 6.69% 2.28% 4.57%
Interest on ST Loans 2.50% 2.44% 1.79% 1.52% 1.31%
Interest on LT Loans 1.33% 1.20% 2.01% 1.74% 1.44%
Interest in Mortgage 2.04% 1.85% 2.43% 2.15% 1.82%
Total Interest 5.88% 5.48% 6.24% 5.41% 4.58%
Before tax earnings 4.62% 5.82% 0.45% -3.14% -0.02%
Taxes 1.85% 2.33% 0.18% -1.25% -0.01%
Net Income 2.77% 3.49% 0.27% -1.88% -0.01%
Dividends on Stock
Addition to Retained 2.77% 3.49% 0.27% -1.88% -0.01%
Earnings
EPS (100,000 shares) 0.00% 0.00% 0.00% 0.00% 0.00%

The table 1.1 shows the common size income statement, it was shown there that the gross
profit and the Net Income continue to decrease every year in five years. As we can see in
2001,the gross profit started decreasing in 2% and this signifies that it was only 18% of the total
revenue that became a profit and that the business was not as efficient as it used to be, and the
following years are still decreasing that results to poor financial performance of the business. It is
also stated that the operating expenses of the company for 5 years are inconsistent, the
miscellaneous expenses have increased from0.34% of sales to 1.50% of sales. While, the selling
and administrative expenses, and interest expense of the business are also inconsistently
decreasing and increasing in 5 years. On the grounds of this, Juan should reassess the firm’s cost
structure like the cost of labor, raw materials and all the cost that affects the operation of the
business. After assessing these, it will help him to reduce the overall cost of the business.

Figure 2.2
Quickfix Autoparts
Balance Sheet

ASSETS 2000 2001 2002 2003 2004

Cash and Marketable 24.22% 39.07% 7.63% 2.95% 1.90%

Accounts Receivable 1.56% 1.52% 2.01% 7.95% 9.30%
Inventory 39.06% 34.14% 50.20% 53.25% 57.82%
Current Assets 64.84% 74.72% 59.84% 64.16% 69.02%

Land,Building, Plant, and 39.06% 31.60% 50.20% 51.20% 51.63%

Equipment
Accumulated -3.91% -6.32% -10.04% -15.36% -20.65%
Depreciation
Net Fixed Assets 35.16% 25.28% 40.16% 35.84% 30.98%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES and
EQUITIES
Short-term Bank Loans 7.81% 18.33% 14.06% 15.16% 15.28%
Accounts Payable 1.56% 1.33% 2.01% 1.64% 1.73%
Accruals 0.78% 0.64% 0.74% 0.95% 1.20%
Current Liabilities 10.16% 20.30% 16.80% 17.75% 18.22%

Long-term Bank Loans 9.90% 12.39% 19.69% 19.46% 18.90%

Mortgage 27.34% 21.87% 27.21% 27.45% 27.26%
Long-term debt 37.24% 34.26% 46.89% 46.90% 46.15%

Total Liabilities 47.40% 54.56% 63.69% 64.65% 64.37%

Common Stock (100,000 50.00% 40.45% 32.13% 32.77% 33.04%

shares)
Retained Earnings 2.60% 4.99% 4.18% 2.58% 2.59%

Total Equity 52.60% 45.44% 36.31% 35.35% 35.63%

Total Liabilities and 100.00% 100.00% 100.00% 100.00% 100.00%

Equity
 Table 1.2 shows that common size balance sheet, it was shown that the current assets are
inconsistently increasing and decreasing. We can see that the accounts receivable is continuously
increasing that results to the decrease in cash. The inventories has a larger part in the current
assets which Juan should have a plan for it. While the the non-current assets such as Land,
Building, and Equipment, and the fixed assets are also increasing. On the other hand, the total
liabilities are also growing every year, as we look closely, the firm’s debt and loans are
excessively increasing and coupled with interests, that gives big effect to the financial
performance of the business. As we can also see, the business has taken on significantly larger
amounts of short and long-term debt relative to its total assets, and equity has not increased
proportionally with debt.

Meanwhile, the different ratios found in question number 3 also shows the financial
performance of the business. In the liquidity ratio, the current ratio shows good effect since it can
pay more than 1x while the quick ratio is shows poor effect since it is less than 1. Quickfix
Autoparts’ Return on total Assets (ROA) and Profit margin is currently negative having-0.01%
but it has already improved from last 2003 with -1.68%, and a Profit margin of -0.01% from
-1.68% in 2003. Moreover, the firm’s total asset turnover has improved since 2002, and that
shows that the business is efficiently generating revenue from its assets. However, Quickfix’s
ROE has been having negative percentage since 2003 having -4.76 but has improved a little in
2004 having -0.03%. This happened because of the rapid decrease of the net profit margin. As
we can see also in DuPont analysis, the equity multiplier is increasing which means that most of
its assets are financed with debt. And because of the debts, the net profit margin is decreasing.

7. If you were the commercial loan officer and were approached by Andre for a short-term
loan of $25,000, what would your decision be? Why?
As a commercial loan officer, I would first check the company’s financial situation of
Andre. I would evaluate if Andre is qualified to be granted a loan. If I was approached by Andre
for a short-term loan of $25,000, I would not grant him the loan. Considering his company’s
financial status, especially the cash-flow situation and profitability ratio, I don’t think that his
company could cover up its loan. We have seen from their company’s financial statements that
for the past two years, the net income has a negative balance and the profitability ratios have
declined. Moreover, Andre’s company had more cash outflows than cash inflows. As a lender, I
should help borrowers make informed decisions about entering into a loan. This is not only good
for them but for my business as well. Andre must first improve its cash flow which I think is
possible. As one businessman to another, I would tell him that if the financial statements
improved, especially his statement of financial performance and cash flows, I might reconsider
granting him a loan.
8. What recommendations should Juan make for improvement, if any?
As we go through the informations of the financial performance of Quickfix autoparts,
we have some recommendations to Juan:
Regarding with the balance sheet, it shows that the inventories is a big part of the current
assets, having more inventories results to lower liquidity, the firms needs to have a good
inventory management through the use of data models, systems, and databases that could help
them to regulate, utilize, and sell off inventories better. Having lower inventory results to higher
liquidity ratio and the business can pay-off short term debts because of sales. Since we are
discussing about management, Quickfix must also have effective and efficient management in
accounts receivable, since the day sales outstanding increased, it shows that there are a lot of
credit sales that the business needs to collect effectively. The collections will generate larger
cash asset that can be used in paying expenses, while the firm should also look after their
expenses and it should be minimized. In minimizing their expenses, Juan should assess the over
all cost of the operation of the business, the firm needs to cut off the irrelevant expenses of the
business. The profitability Ratio of the firm must also needs to improve, to have some
improvement Quickfix might remove the products and services that are not profitable, they
should focus more on the products and services with the highest profit margin.
To help the firm’s operations, Quickfix should hire in charge to manage and regulate the
operations of the business especially when it comes to the financial performance. It would be
better if the in charge is knowledgeable on how to run a business, who have the skills in
accounting, management and communicating. We can see that the firm lacks in management, so
having an in charge who is knowledgeable enough would be a great strength of the firm.