Question

Table 1 - Burnham Inc. Balance Sheets

Assets	2017	2018	2019e
	($‘000)	($‘000)	($‘000)
Cash	8,500	8,800	16,000
Short-Term Investments	50,600	21,500	73,000
Accounts Receivable	352,400	654,300	886,000
Inventories	717,400	1,290,800	1,520,000
Total Current Assets	1,128,900	1,975,400	2,495,000
Gross Fixed Assets	491,500	501,500	701,500
Less: Accumulated Depreciation	147,700	264,400	384,500
Net Fixed Assets	639,200	765,900	1,086,000
Total Assets	1,768,100	2,741,300	3,581,000
Liabilities And Equity	2017	2018	2019e
	($‘000)	($‘000)	($‘000)
Accounts Payable	145,800	324,500	361,600
Notes Payable	201,800	702,000	802,000
Accruals	137,300	287,000	382,800
Total Current Liabilities	484,900	1,313,500	1,546,400
Long-Term Debt	324,800	800,000	1,200,000
Common Stock	460,000	540,000	810,000
Retained Earnings	498,400	87,800	24,600
Total Equity	958,400	627,800	834,600
Total Liabilities And Equity	1,768,100	2,741,300	3,581,000

Table 2 - Burnham Inc. Income Statements

	2017	2018	2019e
Sales	4,429,200	5,831,300	8,031,400
COGS excluding depreciation	2,860,500	4,975,800	5,795,000
Depreciation	18,500	116,600	115,000
Other Expenses	325,000	698,000	590,000
Total Operating Costs	3,204,000	5,790,400	6,500,000
EBIT	1,225,200	40,900	1,531,400
Interest Expense	61,000	173,600	260,400
EBT	1,164,200	-      132,700	1,271,000
Taxes (40%)	465,680	-	508,400
Net Income	698,520	-      132,700	762,600

Table 3 - Burnham Inc. Ratio Analysis

	2017	2018	2019e	Industry Average
Current Ratio (X)	2.33	1.50	1.61	2.00
Quick Ratio (X)	0.85	0.52	0.63	1.00
Inventory Turnover (X)	3.99	3.85	3.81	5.00
Average Age of Inventory (days)	91.54	94.69	95.74	45.00
Average Collection Period (days)	29.04	40.95	40.27	30.00
Average Payment Period (days)	18.60	23.80	22.78	60.00
Fixed Asset Turnover (X)	6.93	7.61	7.40	8.00
Total Asset Turnover (X)	2.51	2.13	2.24	2.50
Debt Ratio (X)	0.46	0.77	0.77	0.35
Debt to Equity Ratio (X)	0.84	3.37	3.29	0.80
Times Interest Earned (X)	20.09	0.24	5.88	20.00
Gross Profit Margin (%)	35.42	14.67	27.85	24.00
Operating Profit Margin (%)	27.66	0.70	19.07	16.00
Net Profit Margin (%)	15.77	-           2.28	9.50	12.00
Return on Total Assets (%)	39.51	-           4.84	21.30	18.00
Return on Equity (%)	72.88	-          21.14	91.37	35.00
Price/Earnings (P/E) Ratio (X)	13.83	-          69.18	21.24	14.00
Market/Book Value Ratio (X)	15.11	11.99	14.91	12.00

Table 4 - Burnham Inc. other data

	2017	2018	2019e
Stock Price ($)	21.00	17.00	20.00
Shares (units)	460,000	540,000	810,000
Earnings per Share ($)	1.52	-           0.25	0.94
Dividend per Share ($)	0.25	-	0.20
Tax Rate (%)	40.00	40.00	40.00
Book Value per Share ($)	1.390	1.418	1.341
Lease Payments ($)	50,000	50,000	80,000

Question

Discuss the major strengths and weaknesses of the firm using the results of Du Pont analysis as projected for 2019.

Answer 1

DuPont Analysis :

2017 2018 2019 Industry Average Net Income 698520 -132700 762600 Sales 4429200 5831300 8031400 Total Assets 1768100 2741300 3581000 Total Equity 958400 627800 834600 Profit Margin= Net Income/Sales 15.77% -2.28% 9.50% 12% Total Assets Turnover= Sales / Total Assets 2.51 2.13 2.24 Financial Leverage= Total Assets/Total Equity 1.84 4.37 4.29 ROE= Net Income/Total Equity 72.88% -21.14% 91.37% 35%

Strengths:

• Financial Leverage is high which means Burnham Inc. is relying on debt and taking benefits of tax shield
• Return on Equity is high as compared to Industry Average which means Shareholders fund are being efficiently used and shareholders are being well-paid off.
• Total Assets Turnover is very high which means Burnham Inc, is utilizing its assets in operations very efficiently.

Weakness:

• Net Profit Margin is less than industry average which means it has to catch up with industry and optimize its operation to increase its profit.
• Financial Leverage is a weakness also as too much relying on debt will make company liquidity a problem, the current ratio and cash ratio will start decreasing which will hinder to get more debt and will reduce credit ratings.