Reference no: EM1310310

Diversified Industries is a large conglomerate and is continually in the market for new acquisitions.  The company has grown rapidly over the last 10 years through buyouts of medium-size companies.  Diversified does not limit itself to companies in any one industry but looks for firms with a sound financial base and the ability to stand on their own financially.

The president of Diversified recently told a meeting of the company's officer: "I want to impress two points on all of you.  First, we are not in business of looking for bargains. Diversified has achieved success in the past by acquiring companies with the ability to be a permanent member of the corporate family.  We don't want companies that may appear to be a bargain on paper but can't survive in the long run.  Second, a new member of our family must be able to come in and make it on its own - the parent is not organized to be a funding agency for struggling subsidiaries."

Ron Dixon is the vice president of acquisitions for Diversified, a position he has held for five years.  He is responsible for making recommendations to the board of directors on potential acquisitions.  Because you are one of his assistants, he recently brought you a set of financials for a manufacturer, Heavy-Duty Tractors, Inc.  Dixon believes that Heavy-Duty is a "can't-miss" opportunity for Diversified and asks you to confirm his hunch by performing basic financial statement analysis on the company.  The most recent comparative balance sheets and income statement for the company follow:

	Dec 31,2007	Dec 31, 2006
Assets
Current assets:
Cash	$48,500	$24,980
Marketable securities	3,750	0
Account receivable, net of allowances	128,420	84,120
Inventories	135,850	96,780
Prepaid items	7,600	9,300
Total current assets	$324,120	$215,180
Long term investment	$55,890	$55,890
Property, plant, and equipment:
Land	$45,000	$45,000
Building and equipment, less accumulated depreciation Of $385,000 in 2007 and $325,000 in 2006	545,000	605,000
Total property, plant, and equipment	$590,000	$650,000
Total assets	$970,010	$921,070
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term notes	$80,000	$60,000
Accounts payable	65,350	48,760
Salaries, wages, and other	14,360	13,840
Income taxes payable	2,590	3,650
Total current liabilities	$162,300	$126,250
Long-term bonds payable, due 2014	$275,000	$275,000
Stockholders' equity:
Common stock, no par	$350,000	$350,000
Retained earnings	182,710	169,820
Total stockholders' equity	$532,710	$519,820
Total liabilities and stockholders' equity	$970,010	$921,070

 

Heavy-Duty Tractors Inc. Statement of Income and Retained Earnings For the Year Ended December 31, 2007 (thousands omitted)
Sales revenue	$875,250
Cost of goods sold	542,750
Gross profit	$332,500
Selling, general, and administrative expenses	264,360
Operating income	$68,140
Interest expense	45,000
Net income before taxes and extraordinary items	$23,140
Income tax expense	9,250
Income before extraordinary items	$13,890
Extraordinary gain, less taxes of $6,000	9,000
Net income	$22,890
Retained earnings, January 1, 2007	169,820
	$192,710
Dividends paid on common stock	10,000
Retained earnings, December 31, 2007	$182,710

1)  How liquid is Heavy-Duty Tractors?  Support your answer with any ratios that you believe are necessary to justify your conclusion.  Also indicate any other information that you would want to have in making a final determination on its liquidity.

2)  In light of the president's comments, should you be concerned about the solvency of Heavy-Duty Tractors?  Support your answer with the necessary ratios.  How does the maturity date of the outstanding debt affect your answer?

3) Has Heavy-Duty demonstrated the ability to be a profitable member of the Diversified family?  Support your answer with the necessary ratios.