CASE 1 -RATIO ANALYSIS CHAPTER 3 April 9, 2011: Dr. Vinnie Boombatz, age 58, chairman of the Board of Directors, CEO and Founder of the VR Manufacturing Company, sat back in his chair and wondered if he it would have been better stay ing in his old job of teaching theatre at Jefferson/ Phila Univ. He thought that managing the needs of his short time ago, he was able to educate young minds and enjoy the amenities of the campus. all of his time was taken up with columns of figures, dollars and spreadsheets. He wanted the company to grow & make moncy, but had no idea about the financial end of the business. many varied clients was getting to be a bit of a headache. Just a Now Dr. Boombatz was a little my stified by financial matters. How does one tell if the company is in good or had shape financially? What on carth would one use to convince a bunch of hard nosed he company was capable of making loads of money in the next few years if it just seemed had some more money now? Dr. Boombatz to be growing and making money, but it never seemed to have enough cash. was always puzled that VR Manufacturi ng Dr. Boombatz reflected back over VR Manufacturing origins and events that led up to today VR Manufacturing started in 2006 after Dr. Boombatz completed the development of a commercial scale product used to coat special military products. Initial seed money for the enterprise came from research grants from the U.S. Military plus contributions from colleagues associates and family. These folks were classified as stockholders (254 as of April 2011, all closely held-not publicly traded). In mid 2008, VR Manufacturing commenced the manufacture and distribution of its first product, Tomahawk Teflon, which is used to coat Tomahawk missiles to ensure smooth discharge from the firing mechanisms. In March. 2008, VR received regulatory approval to market another product that had civilian uses known as RUSTY, which is used to coat metals and very significantly eliminate rust and is especially useful on naval vessels. The (2) products are the only products VR currently produces. However, the company has an active R&D program that is currently investigating other applications. Hummel. There are only (2) other manufacturers of these ty pe of coating products in the world. a German corporation that manufactures a product called transcoat in Germany and distributes it in the United States through its subsidiary, APEX Incorporated and East Side of Huntington. West Virginia. VR has about a 25% share of the market against East Side's 16% and Apes 50% APEX. with the power of giant llummel behind it. waged a continuing marketing war with VR, undercutting VR's prices and wooing its customers away at every opportunity. The matter came to a head in September, when VR Manufacturing filed a S13M suit against APEX. charging unfair trade practices. Dr. Boombatz was reasonable sure that VR would prevail in the suit, and, in fact, APEX had recenily offered to settle out of court for $500.000. Dr. Boombatz's primary problem, he said, was that, although he was convinced the company was sound and would grow, he wasn't sure how to communicate that to potential investors. Just handing out past income statements and balance sheets didn'I seem to be enough. Further, he wasn't even sure the company needed outside financing or how much. He just felt they would need it since they always needed to ask for money in the past. lcome Statements 424 ,321 412 705 9641 1,500 20 2,045 2,056 2,774 (101) 126 1716 2.326 2,347 ( 04) $33 49 069 $03 124 As of Det. 31, years ended As of Dec. 31, years ended: 100 16705 422 0 960 1,102 1,443 9 s124 Other euent L901 2298 2917 | 4,001 3.531 023 Total aaseh Lisbilities Short-sem debt 130 1,162 1,047 Long-lerm debt Total Habifieies 837 1212 1664 Totel equity 2,727 3,8775,486 7,428 10331 Dr. Boombatz had lunch with his banker recently, and thr banker mentioned several restrictive covenants that the company would have to meet if it came to the bank for financing. Dr. Boombatz pulled a sheet of paper from his desk drawer and glanced at it. There were (3) covenants listed: The current ratio must be maintained above 2.25 to 1. The debt-to-assets ratio must be less than 3 to 1. Dividends cannot be paid unless earnings are positive. . Dr. Boombutz didn's think he would have any trouble with the covcnants, but he wasn't sure. He suddenly remembered he bad another meeting and wished that he had more time to analyze the mumbers before the next board meeting. The financial information is presented in figures 1, 2, and 3. Figere 3 25 12 23 1.1 5.6 1.16 2.4 1.3 5.7 1.18 Quict ratio 115 Return on sales Retun on acsets Rctura on oquity Total debt to assets 764% R 44% 12.29% 0.52 Cument ratio 2.7 13 5.7 2.8 15 1.6 Total assct turnover Reture on sales 1.9 11A0% 1904% 0.40 13.7 21.78 1.9 7.00% 1330% 2956% 055 13.000% 27.66% Total debt to Price-curnings Average stock price $31.50 uestions: You are an investor who is considering adding VR Manufacturing to your portfolio. As such you re interested in the company's record of profitability, prospects for the future, degree of risk and how it compares with others in the industry. From that point of view, answer the following: I. What was VR's rate of sales growth in 2010? What is it forecasted to be in 2011, 2012. and 2013 2. What is the company's rate of net income growth in 2011. 2012 and 2013? Is projected net income growing faster or slower than projected sales? After computing these values. take a hard look at the 2011 income statement data to see if you want to make any adjustments. 3. How does VR's current ratio for 2010 compare to APEX's? How does it compare to the industry average? Compute VR's current ratio for 2013. Is there any problem with it? 4. What is VR's total debt to assets ratio for 2010, 2011. 2012. 2013? Is any trend evident in the (4) year period? Does VR in 2010 have more or kess deb than the average company in the industry? 5. What is VR's average accounts receivable collection period for 2010, 2011. 2012.20132 Is the period getting longer or shorter? What are the consequences? 6. How does VR's return on equity ration (ROE) compare to APEX's and the industry for 2010? Using the DuPont mcthod, compare the positions of VR and APEX. Compare ROE for each company using the following formula: a ROE - Profit Margin x Asset Turnover(1 -Debt to Assets). Compare the results to determine the sources of ROE for each company