Question

Using Hatfield’s data and its industry averages, how well run would you say Hatfield appears to be in comparison with other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and point to various ratios that support your position. Also, use the Du Pont equation (see Chapter 3) as one part of your analysis.

Answer 1

Hatfield Medical Supplies: Balance Sheet (Millions of Dollars), December 31		Hatfield Medical Supplies: Income Statement (Millions of Dollars Except per Share)
		2015				2015
Cash		$20		Sales		$2,000.0
Accts. rec.		$280		Op. costs (excl. depr.)	$1,800.0
Inventories		$400		Depreciation		$50.0
Total CA		$700		EBIT		$150.0
Net fixed assets		$500		Interest		$40.0
Total assets		$1,200		Pretax earnings	$110.0
				Taxes (40%)		$44.0
Accts. pay. & accruals	$80		Net income		$66.0
Line of credit		$0
Total CL		$80		Dividends		$20.0
Long-term debt		$500		Add. to RE		$46.0
Total liabilities		$580		Common shares		10.0
Common stock		$420		EPS		$6.6
Retained earnings		$200		DPS		$2.0
Total common equ.	$620		Ending stock price	$52.80
Total liab. & equity		$1,200
Selected Ratios and Other Data, 2015
		Hatfield	Industry			Hatfield	Industry
Op. costs/Sales		90%	88%	Total liability/Total assets	48.3%	36.7%
Depr./FA		10%	12%	Times interest earned	3.8	8.9
Cash/Sales		1%	1%	Return on assets (ROA)	5.5%	10.2%
Receivables/Sales		14%	11%	Profit margin (M)	3.30%	4.99%
Inventories/Sales		20%	15%	Sales/Assets		1.67	2.04
Fixed assets/Sales		25%	22%	Assets/Equity		1.94	1.58
Acc. pay. & accr. / Sales	4%	4%	Return on equity (ROE)	10.6%	16.1%
Tax rate		40%	40%	P/E ratio		8.0	16.0
ROIC		8.0%	12.5%
NOPAT/Sales		4.5%	5.6%
Total op. capital/Sales	56.0%	45.0%
Additional Data		2016
Exp. Saled growth rate	10%
Interest rate on LT debt	8%
Target WACC		9%
a.
Hatfield is less profitable, uses its assets less efficiently, and has too much leverage.
Du Pont ROE	M x	Sales/Assets	x	Assets/Equity	=	ROE
Hatfield	3.30%	1.67		1.94	=	10.6%
Industry	4.99%	2.04		1.58	=	16.1%