Question

SCANDI HOME FURNISHINGS, INC.

Income Statements

                                              2014                   2015                             2016

Net Sales                                      $1,300,000           $1,500,000                         $1,800,000     

Cost of Goods Sold                      780,000                     900,000                      1,260,000       

Gross Profit                               520,000                600,000                              540,000

Marketing                                    130,000                    150,000                              200,000

General & Administrative          150,000                 150,000                             200,000

Depreciation                                  40,000                  53,000                                  60,000

EBIT                                          200,000                    247,000                           80,000

Interest                                                      45,000                   57,000                           70,000

Earnings Before Taxes              155,000                     190,000                           10,000

Income Taxes (40%)                    62,000                         76,000                             4,000

Net Income                                $93,000               $114,000                               $6,000

SCANDI HOME FURNISHINGS, INC.    

Balance Sheets

                                                         2014                                 2015                             2016

Cash                                            $50,000                       $40,000                        $10,000

Accounts Receivables                200,000                       260,000                            360,000

Inventories                                  450,000                       500,000                        600,000

Total Current Assets                 700,000                       800,000                         970,000

Fixed Assets                               300,000                       400,000                        500,000

Total Assets                       $1,000,000              $1,200,000                         $1,470,000

Accounts Payable                     $180,000                 $240,000                     $260,000   

Bank Loan                                    90,000                           90,000                        184,000

Total Current Liabilities           270,000                       330,000                        444,000

Long-Term Debt                        300,000                       400,000                        550,000

Common Stock                           350,000                       350,000                        350,000

Retained Earnings                       80,000                         120,000                        126,000

Total Liab. & Equity            $1,000,000                         $1,200,000    $1,470,000

Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build, cash burn, and the net cash build/burn positions (and their rates) for 2015 and 2016. What, if any, changes have occurred?

Creditors, as well as management, are also concerned about the ability of the venture to meet its debt obligations (and interest) as they come due and the relative size of equity investments to debt levels. Calculate ratios in each of these areas for 2014-2016. Interpret your results and explain what has happened to Scandi.

Kaj and the venture investors are also interested in how efficiently Scandi is able to convert their equity investment, as well as the venture’s total assets, into sales. Calculate several ratios that combine data from the income statements and balance sheets and compare what has happened from 2014-2016.

Answer 1

Cash Build / (Burn)		2015	2016
Opening cash balance		$50,000	$40,000
Closing cash balance		$40,000	$10,000
Cash Build / (Burn)		($10,000)	($30,000)
Cash Build / (Burn) per month		($833.33)	($2,500.00)
Interest Coverage ratio (ICR)
= EBIT/Interest
	2014	2015	2016
EBIT	$200,000	$247,000	$80,000
Interest	$45,000	$57,000	$70,000
ICR	4.44	4.33	1.14
Debt/Equity Ratio
= Total Debt / Total Equity
Total Debt
Bank Loan	$90,000	$90,000	$184,000
Long-Term Debt	$300,000	$400,000	$550,000
	$390,000	$490,000	$734,000
Total Equity	2014	2015	2016
Common Stock	$350,000	$350,000	$350,000
Retained Earnings	$80,000	$120,000	$126,000
	$430,000	$470,000	$476,000
Debt/Equity Ratio	0.91	1.04	1.54
Equity / Debt Ratio	1.10	0.96	0.65
Debt as a percent of long term capital	47.6%	51.0%	60.7%
The Company's Debt/Equity ratio is increasing year on year.
This will increase the debt burden on the Company and is risky for the business in the long term.
As a result Company's Interest Coverage ratio and the Net Income is decreasing
Asset Turnover ratio
= Total Sales / Average Assets
	2014	2015	2016
Total Sales	$1,300,000	$1,500,000	$1,800,000
Opening Assets		$1,000,000	$1,200,000
Closing Asset		$1,200,000	$1,470,000
Average Assets		$1,100,000	$1,200,000
Asset Turnover ratio		1.36	1.50

Cash burn	2014	2015	2016
Expenses
Cost of Goods Sold		900000	1260000
Marketing		150000	200000
General & Administrative		150000	200000
Interest		57000	70000
Income Taxes (40%)		76000	4000
		$1,333,000	$1,734,000
Change in inventory		($50,000)	($100,000)
Change in Payables		$60,000	$20,000
Change in fixed assets		($100,000)	($100,000)
		$1,243,000	$1,554,000
Cash build
Net Sales		$1,500,000	$1,800,000
Change in receivables		($60,000)	($100,000)
Increase in loan		$0	$94,000
Increase in long term debt		$100,000	$150,000
		$1,540,000	$1,944,000
Net (burn) / build		$297,000	$390,000