Question

In: Finance

The following data based on assumption for 2 years projection, Analysis the following income statement and...

The following data based on assumption for 2 years projection, Analysis the following income statement and state whether investor should invest the company or not (250 words minimum)

YEAR 1

YEAR 2

Revenues

$ 2,995,000

$ 3,200,000

Cost of sales

1,894,000

2,100,000

Gross profit

$ 1,101,000

$ 1,100,000

Accounting

8,000

8,300

Advertising and promotion

17,000

11,000

Bank chargers

51,000

55,897

Compensation and benefits

197,546

234,985

Insurance

5,000

5,550

Lease, facilities

350,600

456,000

Legal and professional

15,900

15,900

Licenses and fees

10,000

10,000

maintenance

17,000

18,700

Miscellaneous

12,567

13,400

Security

500

500

Utilities

25,700

28,700

Website

2,000

2,000

Total operating expenses

$ 712,813

$ 860932

EBIDTA

388,187

239,068

Depreciation

(7,893)

(7,893)

Operating profit

380,294

231,175

Interest expense

(41,890)

(42,890)

Earnings before taxes

338,404

188,285

Income taxes

(18,567)

(19,879)

Net Income

319,837

168,406

Solutions

Expert Solution

Net profit margin:

Net margin in year 1 = 319837 / 2995000 = 10.67%

Net margin in year 2 = 168406 / 3200000 = 5.26%

Net margin has come down from 10.67% in year 1 to 5.26% in year 2.

Let's analyse reasons behind this.

Revenues:

% growth in revenues in year 2 = (3200000 - 2995000) / 2995000 = 6.84 % = 7%

Cost of sales:

% increase in cost of sales in year 2 = (2100000 - 1894000 ) / 1894000 = 10.87% = 11%

Gross profit:

% growth in gross profit = ( 1100000 - 1101000) / 1101000 = -0.09% (de-growth)

In year 2, there is 7% growth in sales revenues but increase in the cost of sales is approx. 11%. Therefore, gross profit has gone down slightly compared to year 1 inspite of increase in sales revenue.

% change in Net Income = (168406 - 319837) / 319837 = -47% (de-growth)

There is huge de-geowth in net income in year 2. Let's deep dive to check reasons behind this.

EBITDA:

% change in EBITDA = ( 239068 - 388187 ) / 388187 = -38.4% (de-growth)

There is huge 38.4% de-growth in EBITDA in year 2.

Let's check reasons behind this.

% change in total operating expenses = (860932 - 712813 ) / 712813 = 20.77% = 21% growth.

Operating expenses have grown by 21% in year 2. Let's check the reasons behind this.

As we can see in the chart, most of the expenses are more or less same ot they have slight change

EXCEPT

% change in advertising and promotion = (11000 - 17000) / 17000 = -35% (de-growth)

% change in compensation and benefits = (234985 - 197546) / 197546 = 18.95% = 19%.

% change in lease and facilities = ( 456000 - 350600 ) / 350600 = 30%

In brief,

Operating expenses have been impacted significantly by compensation and benefits and lease and facilities.

Also, advertising and promotions, which are important to bring business, have witnessed 35% de-growth.

Therefore, net income of the company in year 2 has reduced by almost half in year 2.

Therefore, looking at above scenario, investor should not invest in this company.

Incase investor want to invest in this company, he must focus on:

1. reduction in the cost of sales

2. reduction in the compensation and benefits

3. reduction in the lease and facilities


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