Build a Model Solution 11/26/2018
Chapter: 3
Note to us: copy as values the balance sheets and income statements when creating or updating the problem file. An delete this not in the problem file. Duh.
Problem: 15
Joshua & White Technologies: December 31 Balance Sheets
(Thousands of Dollars)
Assets
2019 2018
Cash and cash equivalents $21,000 $20,000
Short-term investments 3,759 3,240
Accounts Receivable 52,500 48,000
Inventories 84,000 56,000
Total current assets $161,259 $127,240
Net fixed assets 223,097 200,000
Total assets $384,356 $327,240
$0
Joshua & White Technologies December 31 Income Statements
(Thousands of Dollars)
2019 2018
Sales $420,000 $400,000
COGS except excluding depr. and amort.
300,000 298,000
Depreciation and Amortization 19,660 18,000
Other operating expenses 27,600 22,000
EBIT $72,740 $62,000
Interest Expense 5,740 4,460
EBT $67,000 $57,540
Taxes (25%) 16,750 14,385
Net Income $50,250 $34,524
Common dividends $18,125 $17,262
Addition to retained earnings $32,125 $17,262
Other Data 2019 2018
Year-end Stock Price
$90.00 $96.00
# of shares (Thousands)
4,052 4,000
Lease payment (Thousands of Dollars)
$20,000 $20,000
Sinking fund payment (Thousands of Dollars)
$5,000 $5,000
Ratio Analysis 2019 2018 Industry Avg
Liquidity Ratios
Current Ratio
2.44 2.52 2.58
Quick Ratio
1.17 1.41 1.53
Asset Management Ratios
Inventory Turnover (Total COGS/Inventories)
3.81 5.64 7.69
Days Sales Outstanding
45.63 43.80 47.45
Fixed Assets Turnover
1.88 2.00 2.04
1.09 1.22 1.23
Debt Management Ratios
Liabilities-to-assets ratio
12.67 13.90 15.33
3.66 3.39 4.18
Profitability Ratios
Market Value Ratios
5.22 7.31 7.11
1.46 1.76 1.72
a. Has Joshua & White’s liquidity position improved or worsened? Explain.
b. Has Joshua & White’s ability to manage its assets improved or worsened? Explain.
c. How has Joshua & White’s profitability changed during the last year?
d. Perform an extended Du Pont analysis for Joshua & White for each year.
ROE improved because the profit margin improved and the equity multiplier increases, despite the
reduction in the total asset turnover ratio. Thus, J&W became more profitable, more leveraged, but less
again indicates a buildup in inventory.
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets
2019 2018
Cash and cash equivalents 5.5% 6.1%
Short-term investments 1.0% 1.0%
The current ratio and quick ratio were a little below the industry average initially. However, the quick
ratio fell by a lot while the current ratio fell by just a little. This indicates a build-up in inventory relative to
other current assets.
All asset management ratios were close to the industry averages initially (although the DSO was a little
better than the industry average) except for the inventory turnover ratio, which was lower than the
industry. However, all ratios worsened, with the inventory turnover showing the biggest change, which
Liabilities and equity
2019 2018
Accounts payable 8.7% 9.8%
Accruals 3.3% 3.7%
Notes payable 5.2% 2.0%
Total current liabilities 17.2% 15.4%
Long-term debt 17.6% 17.8%
Total liabilities 34.8% 33.2%
Common stock 46.4% 54.5%
Retained Earnings 18.8% 12.2%
Total common equity 65.2% 66.8%
Total liabilities and equity 100.0% 100.0%
Common Size Income Statements 2019 2018
COGS except excluding depr. and amort.
f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?
Percent Change Balance Sheets Base
Assets
2019 2018
Cash and cash equivalents 5.0% 0.0%
Short-term investments 16.0% 0.0%
Accounts Receivable 9.4% 0.0%
Inventories 50.0% 0.0%
Total current assets 26.7% 0.0%
Net fixed assets 11.5% 0.0%
Total assets 17.5% 0.0%
Base
2019 2018
Base
Percent Change Income Statements
2019 2018
Sales 5.0% 0.0%
COGS except excluding depr. and amort.
0.7% 0.0%
Depreciation and Amortization 9.2% 0.0%
Other operating expenses 25.5% 0.0%
faster. For example, inventories grew by 50%. Notes payable also grew by a substantial amount.
Fortunately, profitability also grew by more than sales. The trend analysis confirms that profitability
increased, but the increase in inventories is a red flag.
Common size analysis shows that inventories now make up a greater proportion of assets. The
combined long-term debt and notes payable make up a greater proportion of liabilities & equity. Profits
margins have gone up (even though interest expense has also gone up).