Question

(1) Analyze the financial statements below as an individual who would invest in this company. Would you invest? Why or why not? Support your answer using what you have learned and type an essay supporting your answer.

(2) Sales increase by 10 percent. What are the Additional Funds Needed (AFN)?

The balance sheet and income statement shown below are for Flowers, Inc.

Balance Sheet (Millions of $)
Assets	2012
Cash and securities	$ 1,554.0
Accounts receivable	9,660.0
Inventories	13,440.0
Total current assets	$24,654.0
Net plant and equipment	17,346.0
Total assets	$42,000.0
Liabilities and Equity
Accounts payable	$ 7,980.0
Notes payable	5,880.0
Accruals	4,620.0
Total current liabilities	$18,480.0
Long-term bonds	10,920.0
Total debt	$29,400.0
Common stock	3,360.0
Retained earnings	9,240.0
Total common equity	$12,600.0
Total liabilities and equity	$42,000.0
Income Statement (Millions of $)	2012
Net sales	$58,800.0
Operating costs except depr'n	$54,978.0
Depreciation	$ 1,029.0
Earnings bef int and taxes (EBIT)	$ 2,793.0
Less interest	1,050.0
Earnings before taxes (EBT)	$ 1,743.0
Taxes	$     610.1
Net income	$ 1,133.0
Other data:
Shares outstanding (millions)	175.00
Common dividends	$   509.83
Int rate on notes payable & L-T bonds	6.25%
Federal plus state income tax rate	35%
Year-end stock price	$77.69

Answer 1

Let we calculate, some key ratios from the given information.

Market Price		77.69
EPS	(Net Income/No. of Shares)	6.47
Book Value per Share	(Total Assets - Total Liabilities)/ No. of Shares	72.00
P/E Ratio	(Market Price/EPS)	12.00
P/BV Ratio	(Market Price/BVPS)	1.08
Debt To Equity	(Total Debt/Equity)	1.35
OPM%	(Operating Profit/ Net Sales)*100	4.75
ROE	(Net Income/Equity)*100	5.19
Interest Coverage	(EBIT/Interest)	2.66
Current Ratio	(CA/CL)	1.33
Quick Ratio	(CA-Inventory)/CL)	0.61
Asset Turnoover	(Sales/TA)	1.40
Dividend Yield Ratio	(DPS/Market Price)*100	3.75
ROI	(Net Income/TA)*100	2.70

By analysing above calculations, following are the indicators which favours investment:

• Interest coverage is 2.66 means shareholders will get returns
• Book Value per share is nearly equal to market price, we can assume that price is fairly valued in the market.
• P/E Ratio of 12 means the stock is valued fairly n the market
• ROE is reasonable
• OPM is around 5%

However, further analysis will make us we should not invest in the stock:

• Liquidity ratios are less than required. Company may face liquidity problems and will threaten the solvency.
• Assets turnover ratio is low means low productivity.
• Dividend yield is neglizible
• OPM of 5% means future returns are voltile to selling price pressures and increase in operating costs
• ROI is very low comparative tto the investment.
• Trading on equity 0r debt-equity ratio is high and may threaten the solvency

Based on overall analysis, it is advisable to the investor not to invest in the stock at current market price

Besides financial informationnn, the investor should also compare information over the time, other companies in the industry and other relevant factors in making investment decision.

AFN =

Current Level of Assets*Change in Sales/Current sales-Current Level of Liabilties*Change in Sales/Current sales-additional level of sales*profit margin*1-payout ratio

=(24654*5880/58800)-(18480*5880/58800)-(5880*0.0475*0.223083)

=

555.09

Payout ratio from the given details:1-(

1050+610.1+509.83)/2793

=0.223083

Note: Considered only CA & CL for sales increase decision.