In: Finance
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 |
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