Case Analysis

By: Group 12
Aayushi (02), Alakshendra (06), Durgesh (21), Samarth(48)
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 Formula 1988 1989 1990 1991 Q1 Comments
Ratio

Current Ratio (Current 1.80x 1.59x 1.45x 1.35x Trend is

Assets)/ getting Worse
(Current
liabilities)

Quick Ratio (Current 0.88x 0.72x 0.67x 0.54x Trend is

Assets – getting Worse
Inventory)/
(Current
Liabilities)

Cash Ratio (Cash)/ 0.22x 0.13x 0.08x 0.04x Trend is

(Current getting Worse
Liabilities)
 Financial Leverage
Financial Formula 1988 1989 1990 Comments
Leverage
Ratio

Total Debt Ratio (Total Assets – 55% 59% 63% Trend towards
Total increased
Equity)/Total leverage
Assets

Debt-Equity (Total Debt)/ 1.20x 1.42x 1.68x

Ratio (Total Equity)

Equity Multiplier Total Assets/ 2.20x 2.42x 2.68x

Total Equity

Times Interest EBIT/Interest 3.85x 3.05x 2.61x Interest expense

Earned is increasing

Cash Coverage EBIT+Depreciati 3.85x 3.05x 2.61x

on/Interest

Number of Days Accounts 35 days 46 days 46 days Good position –

Payable Payable*365/An helping cash
nual Purchases flow
 Asset Utilization
Asset utilization Formula 1988 1989 1990 Comments
ratio
Inventory COGS/Inventory 5.11x 4.42x 4.67x Projected sales is
Turnover increasing
inventory on
hand

Days Sales 365 / Inventory 71 days 83 78 Taking longer to

Inventory turnover turn Inventory

Receivables Sales/accounts 9.92x 9.07x 8.50x

Turnover receivable

Days Sales in A/R 365/receivables 37 days 40 days 43 days Taking longer to

turnover receive payment

Total Asset Sales/total 2.86x 2.74x 2.89x stable

Turnover assets

Capital Intensity Total 0.35x 0.37x 0.35x stable

assets/sales
 Profitability Ratio
Profitability Formula 1988 1989 1990 Comments
Ratio

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
Calculations
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
computed value (beg inv + purch -
Ending inventory $562 end inv)
Total cost of goods sold $2,592 72%historical % of sales
Gross Profit $1,008
Operating expenses $900 25%historical % of sales
Operating Profit $108
Purchase Discounts* $42 2%(of purch after Q1) assumption
(of average outstanding balance)
Interest expense** $53 10.50% assumption
Net income before income taxes $97
Provision for income taxes $21 34%schedule given in footnote 1
Net income $76
 Balance Sheet
Projected balance sheet for December 31, 1991 (thousands of dollars)
1991
Assets:
Cash $54 1.50%recent % of sales
Accounts receivable, net (12% of sales) $432 12%recent % of sales
Inventory $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 purchases
Accrued 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
1988 1989 1990 1991
(expected)

Net Sales $1697 $2013 $2694 $3500

% increase NA 18.62% 33.83% 29.92%

 Company relying heavily on borrowed funds

 Use the money to pay the accounts payable
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