Question

						Dec 31									Industry Average
Balance Sheet (000)						2015			2016			2017
						$	% of TA		$	% of TA		$	% of TA
Assets
	Current assets
		Cash				1,512	6.81%		1,176	3.6%		1,097	2.3%		6%
		Accounts receivable				6,237	28.09%		10,271	31.2%		15,919	33.4%		20%
		Inventories				4,536	20.43%		7,838	23.8%		12,570	26.4%		31%
		Prepaid expenses				3,780	17.02%		5,140	15.6%		6,840	14.3%		5%
			Total current assets			16,065	72.35%		24,425	74.2%		36,426	76.4%		62%
Gross fixed assets						6,300	28.37%		9,080	27.6%		12,918	27.1%		25%
Less: Accumulated depreciation						2,050	9.23%		2,958	9.0%		4,250	8.9%		9%
Net fixed assets						4,250	19.14%		6,122	18.6%		8,668	18.2%		28%
Intangible assets						567	2.55%		588	1.8%		605	1.3%		4%
All other noncurrent assets						1,323	5.96%		1,790	5.4%		1,985	4.2%		6%
		Total Assets				22,205	100.00%		32,925	100.0%		47,684	100.0%		100%
Liabilities and Stockholders Equity
	Current liabilities
		Notes payable				1,205	5.4%		3,243	9.8%		6,323	13.3%		8%
		Current maturities--L.T.D.				1,008	4.5%		1,460	4.4%		2,246	4.7%		5%
		Accounts payable				3,570	16.1%		5,958	18.1%		9,955	20.9%		16%
		Income taxes payable				84	0.4%		336	1.0%		336	0.7%		0%
		Accruals & other Non Current Liabilities				1,995	9.0%		3,360	10.2%		5,016	10.5%		8%
			Total current liabilities			7,862	35.4%		14,357	43.6%		23,876	50.1%		36%
	Long-term debt					2,940	13.2%		6,100	18.5%		9,350	19.6%		13%
			Total Liabilities			10,802	48.6%		20,457	62.1%		33,226	69.7%		61%
	Stockholder’s equity
		Common stock				3,360	15.1%		3,360	10.2%		3,360	7.0%
		Paid-in capital				2,100	9.5%		2,100	6.4%		2,100	4.4%
		Retained earnings				5,943	26.8%		7,008	21.3%		8,998	18.9%
			Total stockholders’ equity			11,403	51.4%		12,468	37.9%		14,458	30.3%		39%
				Total liabilities & equity		22,205			32,925	100.0%		47,684	100.0%		100%

															Industry Average
Income Statement						2015			2016			2017
						$	% of Sales		$	% of Sales		$	% of Sales
Sales Revenue (All Sales are on account)						50,400	100%		65,100	100%		81,312	100%		100.0%
Less Cost of Goods Sold						35,431	70%		45,872	70%		57,098	70%		71.5%
Gross Profit						14,969	30%		19,228	30%		24,214	30%		28.5%
Less Operating Expenses
	Gen & Admin and Selling					12,331	24%		15,099	23%		17,296	21%		19.6%
	Depreciation Expense					630	1%		908	1%		1,292	2%		3.4%
		Total Operating Expenses				12,961	26%		16,007	25%		18,588	23%		23.0%
Operating Income (EBIT)						2,008	4%		3,221	5%		5,626	7%		5.5%
Less Interest Expense						335	1%		756	1%		1,343	2%		1.1%
Earnings before taxes (EBT)						1,673	3%		2,465	4%		4,283	5%		4.4%
Less Income Taxes (34%)						569	1%		838	1%		1,456	2%		1.8%
Net Income						1,104	2%		1,627	2%		2,827	3%		6.9%
Common Stock Dividends (000)						314			562			837
Number shares common stock (000)						1,120			1,120			1,120
Earnings per Common Share (EPS)						0.71			0.95			1.78
Market price per common share						17.25			17.71			18.43

															Industry Average
Financial Ratios						2015			2016			2017
	Liquidity
		Accounts receivables turnover (times)					8.08			6.34			5.11		9.4
		Average Collection Period (days)					45.17			57.59			71.46		38.8
		Inventory turnover (times)					7.81			5.85			4.54		3.8
		Average days in inventory (days)					46.73			62.37			80.35		96.1
		Current ratio (times)					2.04			1.70			1.53		1.6
		Quick or Acid-test ratio (times)					0.99			0.80			0.71		0.8
	Solvency
		Debt to Equity Ratio					94.7%			164.1%			229.8%		0.667
		Times interest earned (times)					5.99			4.26			4.19		3.4
	Profitability
		Gross profit ratio (%)					29.7%			29.5%			29.8%		5.4%
		Profit margin (%) [before tax]					2.2%			2.5%			3.5%		4.4%
		Asset Turnover					2.26975906			1.977221			1.705226		1.8
		Return on assets (%) [before tax]					7.5%			7.5%			9.0%		8.0%
		Return on equity (%) [before tax]					14.7%			19.8%			29.6%		17.10%
		Price to earnings ratio					$ 24.46			$18.62			$10.37

Cash Flow Statement									2016			2017
Cash, beginning of year									$ 1,512.00			$ 1,176.00
Operating Activities
	Net Income								$ 1,627.00			$ 2,827.00
	Plus Depreciation								$    908.00			$ 1,292.00
	Minus increase in accounts receivable								$ (4,034.00)			$ (5,648.00)
	Minus increase in inventory								$ (3,302.00)			$ (4,732.00)
	Minus increase in prepaid expenses								$ (1,360.00)			$ (1,700.00)
	Plus increase in accounts payable								$ 2,388.00			$ 3,997.00
	Plus increase in income taxes payable								$    252.00			$       -
	Plus increase in accruals & other cur. Liab.								$ 1,365.00			$ 1,656.00
		Net Cash from operating activities							$ (2,156.00)			$ (2,308.00)
Investment Activities
	Fixed asset acquisitions								$ (2,780.00)			$ (3,838.00)
	Change in intangible assets								$    (21.00)			$    (17.00)
	Change in all other noncurrent activities								$   (467.00)			$   (195.00)
		Net Cash from investing activities							$ (3,268.00)			$ (4,050.00)
Financing Activities
	Change in notes payable								$ 2,038.00			$ 3,080.00
	Change current maturities--L.T.D.								$    452.00			$    786.00
	Change in long-term debt								$ 3,160.00			$ 3,250.00
	Change in Com Stock & paid-in cap								$       -			$       -
	Dividends paid								$   (562.00)			$   (837.00)
		Net Cash from financing Activities							$ 5,088.00			$ 6,279.00
Net Change in Cash									$   (336.00)			$    (79.00)
Cash, end of year									$ 1,176.00			$ 1,097.00

9.what is your overall evaluation of HTCM’s financial condition?

10. What is the market’s assessment of HTCM’s financial condition? Explain. Does the market’s assessment confirm or refute your analysis?

11. Based on your evaluation of HTCM and the market’s assessment of the firm, would you accept employment with the company? Explain.

Answer 1

9) The financial condition of the company depends on six key 6 key ratios namely current ratio, quick ratio, return on equity (ROE), earnings per share (EPS), price to earnings (P/E) and debt to equity (D/E). From the given data, all these parameters have improved simultaneously.

Current ratio has improved from 2.04x in CY15 to 1.53x in CY16, quick ratio also improved from 0.99x in CY15 to 0.71x in CY17, ROE also grew from 14.70% in 29.60% in CY17, EPS grew from $ 0.71 in CY15 to $ CY1.78 & hence P/E ratio has declined from 24.3x to 10.4x during the same period, D/E also improved from 94.70% to 229.80% in the same period. Hence, HTCM’s financial condition sounds healthy.

10) Sales grew at a compunded annual growth rate (cagr) of 17% from CY15 to CY17. EBITDA margins grew by 130 bps from 2.2% in CY15 to 3.5% in CY17. Similarly, Net Income margins (PAT to Sales) also grew from 2.2% in CY15 to 3.5% in CY17. Dividend payout ratio consistent at 0.3 of Net Income. The FCFF (free cashflow to the firm) is declined from $-1611.2 in CY16 to $-1314.8 to CY17 due to increase in capital expenditure during the same period, which is fine. So, market’s assessment of HTCM’s financial condition will confirm my analyses.

	CY16	CY17
EBIT	3,221	5,626
Tax rate	0.34	0.34
Depreciation	908	1292
Capex	2,780	3,838
Change in WC	1,865	2,482
FCFF	-1611	-1315

11) Based on my evaluation of HTCM and the market’s assessment of the firm, I would accept employment with the company because every financial parameters is improving which states that the company is doing good in its business operations. It will be a good opportunity to work for this company due to sound career progression.