Chapter 5: Evaluating Operating and Financial Performance 191 MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014 profits fell sharply in 2016, causing Kaj to wonder what was happening to his pride and jor business venture. After all, kaj worked as closely as possible to a 24/7 paco, beginning with the startup of Scandi and continuing through the first three full years of operation Scandi Home Furnishings, located in easter North Carolina, designs, manufactures, and sells Scandinavian designed furniture and accessories to home furishing retailers. The modern Scandinavian design has a streamlined and unclut tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing, Structurally strong modem fumiture. Danish furnishings and the home furnishings produced by other Scandinavian countries,Sweden, Norway, and Finland--are made using wood (primarily oak, maple, and ashl, aluminum, steel, and high-grade plastics Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical University in Sweden As is typical in Europe, kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After leaming the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013 With $140.000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying contacting, and selling to home furnishings retailers in Califomia, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2015 2016 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation EBIT Interest Earnings before taxes Income taxes (40%) Net income Cash Dividends $1,300,000 780,000 520,000 130,000 150,000 40.000 200,000 45,000 155,000 62,003 $ 93.000 $ 0 $1,500,000 900.000 600.000 150.000 150.000 53 000 247.000 57.000 190.000 76.000 $ 114000 $ 74000 $1,800.000 1,260,000 510,000 200,000 200,000 30.000 80,000 70,000 10,000 4,000 $ 6.000 $ (continued on next page venture's eficiency profitability, and leverage performance Calculate ROA and ROE models for the 2014-2015 Put 2 Ong and Operating the Venture Scandi Home Furnishings, Inc. (Continued SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2014 200.000 000 700.000 2015 $ 40.000 250.000 500.000 800.000 400000 $1.200.000 2016 $ 10.000 360.000 800.000 970.000 500.000 $1.470.000 $1.000 DO Your first challenge is to advise on what has been happening with Scandi Home Furnishings from a liquidity perspect E ka and the venture investors are also interested in how efficiently Scandi is able to convert its equity investret well as the ventures total assets, into sales Calculate Several ratios that combine data from the income stated FA ROA del consisting of the product of two ratios provides an overview of a venture's efficiency and profito at the same time An ROE model consists of the product of the ratios and Simultaneously shows an overview of Part A $2000 $ 170.000 50 000 70.000 90.000 90.000 Balbo 270.000 330,000 Lonto de 300.000 400.000 350.000 350.000 Rendraming 30 000 120,000 $1.000.000 $1 200.000 *250.000 shares of common stad were issued Kasussen and the venture investors when Sand Home Fishing was incorporated in mid-2013 $190.000 80.000 184000 444.000 550.000 350.000 126,000 $1,470,000 A kaj was particularly concerned by the drop in cast from ss0.00 in 2014, 201510.000 in 2016. Calculate the area current rate, the quick ratio, and the NWC-to total assets ratio for 2014-2015 and 2015-2016. What has become B Kay should be interested in knowing whether Scandi has been building or burning cash. Compare the cash buid.cat born and the net cash build/bum positions for 2015 and 2016. What, if any, changes have occurred? Part B Your second challenge is to advise Kaj on what has been hengening to Scandi from a financial leverage, profitability efficiency perspective C Directors as well as management, are also concerned about the ability of the venture to meet its debt obligations they come ha proportion of current liabilities to el debt, the availability of assets to meet debt obligation the event of brancal distress and the native site of equity investments to debt levels. Calculate average each of these arsas for the 2014-2015 and 2015-2016 periods. Interpret your results and explain what has happene to Scandi D. Of importance to si and the venture investors is the efficiency of the operations of the venture. Several profit may moich relating to the snorme statement are available to help analyze Scandi's performance. Calculate average pel margin raties for 2014-2015 and 2015-2016 and describe what is happening to the profitability of Scand Her Furnishings and relance sheets and campure what has happened between the 2014-2015 and 2015-2016 periods 2015-2016 periods. Provide an interpretation of your findings Chapter 5: Evaluating Operating and Financial Performance 19 Scandi Home Furnishings, Inc. (Continued) Part C Your third challenge is to advise Kaj on what has been happening to Scandi relative to financial developments in the home furnishings industry G. Kaj has been able to obtain some industry ratio data from the home furnishings industry trade association to which he belongs. The industry association collects proprietary financial information from members of the association, compiles averages to protect the proprietary nature of the information, and provides averages for use by individual trade associ- ation members. Trade association data for the home furnishings industry show an average net profit margin of 6.5 percent, a sales- to-assets ratio of 1.3 times, and a total-debt-to-total-assets ratio of 55 percent over the 2014-2015 and 2015-2016 periods. Compare and contrast Scandi's results with the industry average in terms of the ROA and ROE models. Make sure you compare the components of each model as well as the product of the components. Chapter 5: Evaluating Operating and Financial Performance 191 MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014 profits fell sharply in 2016, causing Kaj to wonder what was happening to his pride and jor business venture. After all, kaj worked as closely as possible to a 24/7 paco, beginning with the startup of Scandi and continuing through the first three full years of operation Scandi Home Furnishings, located in easter North Carolina, designs, manufactures, and sells Scandinavian designed furniture and accessories to home furishing retailers. The modern Scandinavian design has a streamlined and unclut tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing, Structurally strong modem fumiture. Danish furnishings and the home furnishings produced by other Scandinavian countries,Sweden, Norway, and Finland--are made using wood (primarily oak, maple, and ashl, aluminum, steel, and high-grade plastics Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical University in Sweden As is typical in Europe, kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After leaming the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013 With $140.000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying contacting, and selling to home furnishings retailers in Califomia, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2015 2016 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation EBIT Interest Earnings before taxes Income taxes (40%) Net income Cash Dividends $1,300,000 780,000 520,000 130,000 150,000 40.000 200,000 45,000 155,000 62,003 $ 93.000 $ 0 $1,500,000 900.000 600.000 150.000 150.000 53 000 247.000 57.000 190.000 76.000 $ 114000 $ 74000 $1,800.000 1,260,000 510,000 200,000 200,000 30.000 80,000 70,000 10,000 4,000 $ 6.000 $ (continued on next page venture's eficiency profitability, and leverage performance Calculate ROA and ROE models for the 2014-2015 Put 2 Ong and Operating the Venture Scandi Home Furnishings, Inc. (Continued SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2014 200.000 000 700.000 2015 $ 40.000 250.000 500.000 800.000 400000 $1.200.000 2016 $ 10.000 360.000 800.000 970.000 500.000 $1.470.000 $1.000 DO Your first challenge is to advise on what has been happening with Scandi Home Furnishings from a liquidity perspect E ka and the venture investors are also interested in how efficiently Scandi is able to convert its equity investret well as the ventures total assets, into sales Calculate Several ratios that combine data from the income stated FA ROA del consisting of the product of two ratios provides an overview of a venture's efficiency and profito at the same time An ROE model consists of the product of the ratios and Simultaneously shows an overview of Part A $2000 $ 170.000 50 000 70.000 90.000 90.000 Balbo 270.000 330,000 Lonto de 300.000 400.000 350.000 350.000 Rendraming 30 000 120,000 $1.000.000 $1 200.000 *250.000 shares of common stad were issued Kasussen and the venture investors when Sand Home Fishing was incorporated in mid-2013 $190.000 80.000 184000 444.000 550.000 350.000 126,000 $1,470,000 A kaj was particularly concerned by the drop in cast from ss0.00 in 2014, 201510.000 in 2016. Calculate the area current rate, the quick ratio, and the NWC-to total assets ratio for 2014-2015 and 2015-2016. What has become B Kay should be interested in knowing whether Scandi has been building or burning cash. Compare the cash buid.cat born and the net cash build/bum positions for 2015 and 2016. What, if any, changes have occurred? Part B Your second challenge is to advise Kaj on what has been hengening to Scandi from a financial leverage, profitability efficiency perspective C Directors as well as management, are also concerned about the ability of the venture to meet its debt obligations they come ha proportion of current liabilities to el debt, the availability of assets to meet debt obligation the event of brancal distress and the native site of equity investments to debt levels. Calculate average each of these arsas for the 2014-2015 and 2015-2016 periods. Interpret your results and explain what has happene to Scandi D. Of importance to si and the venture investors is the efficiency of the operations of the venture. Several profit may moich relating to the snorme statement are available to help analyze Scandi's performance. Calculate average pel margin raties for 2014-2015 and 2015-2016 and describe what is happening to the profitability of Scand Her Furnishings and relance sheets and campure what has happened between the 2014-2015 and 2015-2016 periods 2015-2016 periods. Provide an interpretation of your findings Chapter 5: Evaluating Operating and Financial Performance 19 Scandi Home Furnishings, Inc. (Continued) Part C Your third challenge is to advise Kaj on what has been happening to Scandi relative to financial developments in the home furnishings industry G. Kaj has been able to obtain some industry ratio data from the home furnishings industry trade association to which he belongs. The industry association collects proprietary financial information from members of the association, compiles averages to protect the proprietary nature of the information, and provides averages for use by individual trade associ- ation members. Trade association data for the home furnishings industry show an average net profit margin of 6.5 percent, a sales- to-assets ratio of 1.3 times, and a total-debt-to-total-assets ratio of 55 percent over the 2014-2015 and 2015-2016 periods. Compare and contrast Scandi's results with the industry average in terms of the ROA and ROE models. Make sure you compare the components of each model as well as the product of the components