Reference no: EM131620

Case Analysis

A brief outline of the firm and its industry is given, as well as a few tips for your attention. You are given three years' worth of income statements and balance sheets to examine.

You are a financial analyst working for an investment firm. This manufacturer has asked for your firm's help in raising capital for the upcoming season's production requirements. It is your job to analyze the financial statements and comment to the investment brokers on this firm's current financial situation. It is late July, and the firm's financial statements (representing the fiscal year ending June 30) have just been released.

For this project you must recreate the attached financial statements on separate worksheets in an Excel workbook. Then, on another worksheet, you must create formulas to calculate the financial ratios that can be derived from the given financial statements. These ratios are to be calculated using formulas in the cells that are linked to the other worksheets: no credit will be given if the ratios are calculated by hand and entered into the cells. You must determine which ratios can be calculated with the information given, based on the ratios given in your textbook. There is enough data for you to calculate liquidity, asset management, leverage, and profitability ratios. You must calculate the Du Pont ratio analysis separately. All three years' worth of ratios must be calculated, and should be presented in chronological order for you to do trend analysis.

Outdoor Sports, Inc.

Outdoor Sports, Inc. is a manufacturer of surfboards, wind surfers, and related equipment. The company was started by two surfers tinkering in their garage with surfboards of their own design. The company has grown rapidly, cashing in on the increasing popularity of wind surfing.

Outdoor Sports' business is highly cyclical. Inventory is built up during the late fall and winter months, and the majority of sales are booked and delivered to distributors during the early spring. Competition among the many manufacturers of this easily made product line is intense. Small manufacturers like Outdoor Sports are under great pressure from major sports equipment makers, who have substantial promotional resources at their disposal, as well as complementary products, countercyclical to the sale of surfing equipment. Brand recognition is an important selling point in this competitive business, achieved at considerable expense through sport personality endorsements and other promotional campaigns.

What to expect from Outdoor Sports' financials depends on when they are examined during the fiscal year. At June 30, the company's fiscal year-end, the financials should look most favorable. Receivables, inventory, payables, and working capital borrowings should be at seasonal lows. The firm should be cash rich, as it is about to gear up for the next season's production run. Property, plant and equipment should be at some significant level commensurate with the company's manufacturing demands, supported by equity and long-term debt.

Sales margins bear close watching. Pricing pressures caused by intense competition can erode them to dangerously low levels. Given the seasonality of the business, there may be a cash flow crunch during the winter months. Overall, cash flow may be a problem if the business is still growing rapidly, and requires outside financial resources to do so.

The potential of overproducing during the winter period for a spring sales period that fails to live up to management's expectations is also a significant risk.

		OUTDOOR SPORTS, INC.
		Balance Sheet ($000s)
		June 30, 2011
				2009		2010		2011
ASSETS
Current Assets
	Cash			182		25		30
	Accounts Receivable			338		391		349
	Inventory			283		831		1,207
	Prepaid Expenses			63		33		11
	Other Current Assets			11		8		3
		Total Current Assets		877		1,287		1,601
Propert, Plant & Equipment
	Land, Buildings & Equipment			842		842		941
	Less Accumulated Depreciation			179		226		286
	Net land, Buildings & Equipment			663		616		655
Total Assets				$   1,540		$   1,903		$   2,255
LIABILITIES
	Accounts Payable, Trade			129		283		347
	Accounts Payable, Other			80		52		61
	Accrued Expenses			0		0		0
	Short-Term Debt			184		413		745
	Income Tax Payable			61		0		0
		Total Current Liabilities		454		748		1,152
Long-Term Debt				578		682		869
		Total Liabilities		1,031		1,430		2,021
Stockholders' Equity
	Capital Stock			275		275		275
	Retained Earnings			234		198		(41)
		Total Stockholders' Equity		509		473		234
Total Liabilities and Equity				$   1,540		$   1,903		$   2,255

 

	Outdoor Sports, Inc.
	Income Statement ($000s)
	June 30, 2011
		2009		2010		2011
Sales		2,519		4,914		6,185
Cost of Goods Sold		1,460		2,899		4,172
	Gross Income	1,059		2,016		2,013
Operating Expenses		732		1,898		2,060
Depreciation Expense		30		47		61
	Operating Income (EBIT)	297		72		(107)
Interest Expense		72		107		132
Income Tax Expense		90		0		0
Other Expense		47		0		0
Net Income		$      89		$     (36)		$    (239)