By: Group 12Aayushi (02), Alakshendra (06), Durgesh (21), Samarth(48)

Case Analysis

Introduction

Background

History of Organization

Main Problems

Reasons

What Next

SALES Figures

1988 1989 1990 Expected 1991

Net Sales $1697 $2013 $2694 $3600

% Increase NA 18.62% 33.83% 29.92%

% increase in sales of Butler Lumber Company

• Butler is having a loan of $70000 to be paid in 10 years .• $247,000 loan to Sub-urban National Bank.• 2% discount on payment with 10 days invoice.

BUTLER Property Figures

Personal House* $72000

Insurance Policy $70000

House on Wife’s name $55000

* Personal House is mortgaged for $38000.

Liquidity

Liquidity Ratio

Formula 1988 1989 1990 1991 Q1 Comments

Current Ratio

(Current Assets)/(Current liabilities)

1.80x 1.59x 1.45x 1.35x Trend is getting Worse

Quick Ratio (Current Assets – Inventory)/(Current Liabilities)

0.88x 0.72x 0.67x 0.54x Trend is getting Worse

Cash Ratio (Cash)/(Current Liabilities)

0.22x 0.13x 0.08x 0.04x Trend is getting Worse

Financial LeverageFinancial Leverage Ratio

Formula 1988 1989 1990 Comments

Total Debt Ratio

(Total Assets – Total Equity)/Total Assets

55% 59% 63% Trend towards increased leverage

Debt-Equity Ratio

(Total Debt)/(Total Equity)

1.20x 1.42x 1.68x

Equity Multiplier

Total Assets/Total Equity

2.20x 2.42x 2.68x

Times Interest Earned

EBIT/Interest 3.85x 3.05x 2.61x Interest expense is increasing

Cash Coverage

EBIT+Depreciation/Interest

3.85x 3.05x 2.61x

Number of Days Payable

Accounts Payable*365/Annual Purchases

35 days 46 days 46 days Good position – helping cash flow

Asset UtilizationAsset utilization ratio

Formula 1988 1989 1990 Comments

Inventory Turnover

COGS/Inventory

5.11x 4.42x 4.67x Projected sales is increasing inventory on hand

Days Sales Inventory

365 / Inventory turnover

71 days 83 78 Taking longer to turn Inventory

Receivables Turnover

Sales/accounts receivable

9.92x 9.07x 8.50x

Days Sales in A/R

365/receivables turnover

37 days 40 days 43 days Taking longer to receive payment

Total Asset Turnover

Sales/total assets

2.86x 2.74x 2.89x stable

Capital Intensity

Total assets/sales

0.35x 0.37x 0.35x stable

Profitability Ratio

Profitability Ratio

Formula 1988 1989 1990 Comments

Profit Margin NI/Sales 1.83% 1.69% 1.63% Decreasing trend is concern

ROE NI/Total Equity

11.48% 11.18% 12.64%

ROA NI/Total Assets

5.22% 4.62% 4.72%

Income Statement

Projected income statement for 1991 (thousands of dollars) Assumptions  1991   Value Explanation

Net sales $ 3,600

$ 3,600 given in case

Cost of goods sold: Beginning inventory $418 from Ex 1 Purchases $2,736 76%historical - 75% of sales Total goods available for sale $3,154

Ending inventory $562 computed value (beg inv + purch - end inv)

Total cost of goods sold $2,592 72%historical % of salesGross Profit $1,008 Operating expenses $900 25%historical % of sales Operating Profit $108 Purchase Discounts* $42 2%(of purch after Q1) assumption

Interest expense** $53 10.50%(of average outstanding balance) assumption

Net income before income taxes $97 Provision for income taxes $21 34%schedule given in footnote 1Net income $76          

Calculations

Balance SheetProjected balance sheet for December 31, 1991 (thousands of dollars)  1991      Assets:Cash $54 1.50%recent % of salesAccounts receivable, net (12% of sales) $432 12%recent % of salesInventory $562 computed value from above Current Assets $1,048 Property, net $216 6%recent % of sales Total Assets $1,264

Liabilities:Accounts payable $75 10days of purchasesAccrued expenses $54 1.50%historical % of sales

Long-term debt, current portion $ 7 $ 7 constant amortization

Bank note payable (plug) $661 computed plug value Current Liabilities $797 Long-term debt $43 computed value Total Liabilities $840 Net worth $424 computed value Total Liabilities plus net worth $1,264          

Asset - (TL+NW except for Bank note) $661 computed value

Suggestions as BLCs financial advisor

Increase in sales

Company relying heavily on borrowed funds

Use the money to pay the accounts payable

1988 1989 1990 1991 (expected)

Net Sales $1697 $2013 $2694 $3500

% increase NA 18.62% 33.83% 29.92%

Suggestion as a banker

Relying on trade credit, 2% 10 days , heavy need of cash

What if there is recession?? Although sales are increasing: no

plans of hiring manpower…. Can lead to inefficiency

Day sales A/R ratio decreasing Efforts on inventory management to

check on stagnant inventory

Conclusion

Butler Lumber Company was a profitable business

Net income growing at slower rate than operating expenses

Better inventory management will increase the cash fund and free up the warehouses