Question

Topic/Area

Financial Statement Analysis

Logistics

Due Date: Monday, March 18, 2019 by 5:00pm.
Submission: Upload your submission file to D2L under Assignments. Include your first and last name in the title of the files you upload. Each individual will submit one (1) Excel workbook and one (1) Word document. There should be only one (1) worksheet in the workbook.

Provided Information

Donna James, a 2009 graduate of the University of Florida with 4 years of banking experience, was recently brought in as an assistant to the chairperson of the board of Keystone Foods, a small food producer that operates in southeastern Pennsylvania and whose specialty is high-quality pecan and other nut products sold in the snack food market. Keystone’s president, Jimmy Watkins, decided in 2017 to undertake a major expansion and to “go national” in competition with Frito-Lay, Eagle, and other major snack food companies. Watkins believed that Keystone’s products were of higher quality than the competition’s; that this quality differential would enable it to charge a premium price; and that the end results would be greatly increased sales, profits, and stock price.

The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Keystone’s results were not satisfactory, to put it mildly. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit.

Its board of directors, which consisted of the president, vice president, and major stockholders (all of whom were local business people), was most upset when directors learned how the expansion was going. Unhappy suppliers were being paid late; and the bank was complaining about the deteriorating situation, threatening to cut off credit. As a result, Watkins was informed that changes would have to be made - and quickly; otherwise, he would be fired. Also, at the board’s insistence, Donna James was brought in and given the job of assistant to Frederico Ortez, a retired banker who was Keystone’s chairperson and largest stockholder. Ortez agreed to give up a few of his golfing days and help nurse the company back to health, with James’ help.

James began by gathering the financial statements and other data given (see supplemental spreadsheet schedules). She also projected financial statement data for 2019 (see supplemental spreadsheet schedules), assuming that some new financing is arranged to get the company “over the hump.”

James examined monthly data for 2018 (not provided in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, she noticed that it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Keystone’s managers had anticipated. For these reasons, James and Ortez see hope for the company - provided it can survive in the short run.

Other pertinent facts:

• Keystone purchases materials on 30-day terms, meaning that it is supposed to pay for purchases within 30 days of receipt.

• Keystone spends money for labor, materials, and fixed (long-term) assets (i.e., depreciation) to make products - and spends still more money to sell those products. Then, the firm makes sales that result in receivables, which eventually results in cash inflows.

• Keystone’s sales manager changed the company’s sales terms to 60-day credit terms rather than 30-day terms which were historically offered. Keystone’s competitors reacted by offering similar terms.

Required Submission

James must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Using spreadsheet software (i.e., Microsoft Excel or Google Sheets) and word processing software (i.e., Microsoft Word or Google Docs), respond to the following items, providing clear explanations, not simply “yes” or “no” answers. In all cases requiring computation, determine your responses using appropriate formulas. DO NOT simply key in an answer without computation.

1. Identify specific ratios that should be used to assess the financial health of Keystone. Justify your inclusion of each selected ratio. Be sure to also classify these ratios based on what aspect of the firm’s characteristics they reflect (e.g., liquidity).

2. For each given year, conduct calculations for the ratios you identified in #1. Show the appropriate formula for each ratio, the value(s) used in the numerator and denominator, and the final calculated result.

3. Discuss/interpret each ratio in the context of the company’s overall financial health. Which ratios are positive and/or show improvement? Which ratios continue to highlight areas for further investigation or problems? Discuss any trends in the ratios that you observed over the time period presented.

4. Based on your analysis, what three (or more) specific actionable items could Keystone do to improve its financial health? Be specific in your response and discuss the implication of your recommendation; for example, if you suggest that the company should pursue raising capital through a bond issue, you should discuss the merits of this recommendation, note any limitations that the company may encounter, and discuss the expected implication on the firm’s financial results. On the later, a high-level discussion on the financial results will suffice, such as, “if a bond issue is undertaken, the company would be responsible for paying bond interest expense which would negatively affect cash flow.

Answer 1

Company recorded revenue of $ 73,785 million in the year which fell down to $ 69,495 million in 2016 which recovered again in 2017 to $ 71,879 million. Despite the fall in the revenue amounts, Gross Margin reduced marginally only and was sustained at $ 20,623 in 2016 against $ 1,788 in 2015. However, the interest expense did increased significantly by 40% in 2016 owing to one of loan repayment.

Company is the leading company as compared to its industry as it having high profitability as compared to industry and lower expenses as compared to industry. The cost of sales of the company is lower than the industry standards which show better efficiency and effectiveness of utilization of resources by the company. Although selling expenses and depreciation are high as compared to industry but it shows that company has much large selling points and better equipments and machineries which indirectly affected the Gross profit as well as net profit positively as compared to industry