Bay Area Corrugated Pipe

How is BACP doing? Why? What should they do?

BACP Performance

Profitability is Low
Return on Equity: Net Income/Equity 313,500 / 5,870,000 = 5.3%

Net Profit Margin = Net Income/Sales

After Tax: 313,500 / 24,000,000 = 1.3%

Components of ROE
ROE = Return on Equity = Net/Equity = Net Income / Sales x Sales / Assets x Assets / Equity Hence, some reasons can be
Margins too low? Why? Using assets poorly? Which ones?

Analysis of Costs
Cost of Goods Sold (COGS) =
19,470,000 / 24,000,000 = 81.1% Median for Industry is 77.8%
How important is the difference?

Analysis of Costs
Selling &Administrative Cost % of Sales
(includes depreciation in the industry comps)

=(2,840,000 + 675,000) /24,000,000 = 14.6% Higher than the median (13.7%) Lower than the maximum (19.2%) Important?

How Well Are Assets Used?

Asset Turnover: Rotation of Assets
Total Asset Turnover = Sales/Assets =24,000,000 / 16,000,000 = 1.5 times Last in the industry: They get less out of their assets than others do!

Return on Assets (Ex Post)

After-tax Return on Assets
After-tax Income/Assets = 313,500/16,000,000 = 1.96% The very bottom is 1.9% Very poor, again.

Fixed Assets & Current Assets

Fixed Asset Turnover = Sales / Fixed Assets = 24,000,000/3,400,000 = 7.1x
Dead last (lower than the officially listed bottom number)

Current Asset Turnover = Sales / Current Assets = 24,000,000 / 12,600,000 = 1.9x

Dead last

Current Assets: Receivables

Turnover = Sales / Accts Receivable = 24,000,000 / 4,600,000 = 5.2x Days = 365/Turnover = 70 days At the Median: 10x, or 2.4MM in Receivables: Could reduce by $2.2MM

Current Assets: Inventory

Turnover = Cost of Goods / Inventory = 19,470,000 / 7,200,000 = 2.7x Days = 365/Turnover = 138 days
At the Median: 6.3x, or 3MM in Inventory: Could reduce by $4.2MM

Conclusions So Far
Overinvestment in Assets
Total Assets (all of them!) Fixed Assets Accounts Receivable Inventory

That causes: Too much investment that somebody has to pay for. A/R and Inventory Alone: >$6MM

Reduce Assets by $6MM and...

What should they do with the $6MM?
One alternative: Pay off interest-bearing debts Thus: No interest costs

Hence: Pretax Income = Operating Income, or $1,015,000

After tax, theyd have $669,900 and Achieve an ROE of 11.4% (669.9/5870): Mediocrity!

Summary Points
Financial ratios really can help identify the problems of an underachiever To be meaningful, compare
Across time Across similar firms (comparables) and calculate consistently

Good values for ratios depend on the nature of the business