Financial Analysis Task

Key Points Custom Snowboard Inc. SCOFF Report: Custom Snowboards Inc. Has found a lot of success both in the united States and overseas. Their products are so popular the company is considering an expansion into Europe to better serve their international customers and expand their brand to a new market. However, all the risks off very expensive expansion must be considered as well as the benefits needs to be reviewed.

The key points that must be addressed in the income statement are: Increasing Gross Profits Decreasing Net Earnings Increasing Total Operating Expenses Decreasing Operating Income The key points that must be addressed In the balance sheet are: & Cash equivalents Short-Term Investments Decreasing Accounts & Accounts Payable Decreasing Total Long Term Liabilities Decreasing Total Liabilities Equity Changes to Cash All of these elements will help show us Custom Snowboards company profitability, liquidity, and creditworthiness. Gross Profit Increase By year 12 the gross profit for the company reached 2,053,100.

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It dropped to 1,920,800 In year 13, and jumped up slighted by year 14 at 1,945,300. There was a significant drop In gross profits between year between year 12 and year 13 of about 132,300. Between year 13 and 14 there was small Increase In gross profits of about 24,500. Increased gross profit Is good news to any company. It proves that the company and their products have a strong potential for growth and further profits. Year 12 proved most lucrative with net earnings of 160,500. By year 13 that flexure dropped dramatically to 51,900 and by year 14 that figure crumbled to 14475. This should be a huge red flag to the SCOFF.

Decreasing net earnings could affect the Meany’s ability to pay off debt quickly or figures like these could indicate another problem like overspending. This decrease will most likely affect earnings per share. Increasing Total Operating Expenses From year 12 to year 14 there is has been a slight Increase every year. Year 12 the operating expenses were 1 By year 13 It Increased 1 8,200 to 1,774,800 and by year 14 It Increased a whopping 76,500 to 1,851 ,300. There were four departments In the operations expenses that went up Including administrative payroll, executive compensation, Utilities, and other administration expenses.

While some of these Lana utilization. Other expenses like employee and executive compensation is not as well Justified due to lower net sales in year 13 & 14. Also, the “Other General & Admit Expenses” category Jumped to significantly and those frivolous expenses are taking away from the company’s profits or ability to pay other debts off. Decreasing Operating Income The operating income shows decrease year after year. Year 12 the operating income was 296,500 by year 13 it dropped to 146,000 and by year 14 is dropped again to 94,000. Through thorough budgeting the company is proportioning excess income by increasing operating expenses.

This can be viewed as positive if they are still selling snowboards with less money. Changes to Cash & Cash Equivalents There were a lot of things going on from in this department. There was a constant increase from year 12- year 14. Year 12 the figure was 121,000 by year 13 it increased to 198,583, and Just a slight decrease in year 14 at 198,413. The variations of these figures could prove a defect in the company’s budgeting methods. Short Term Investments During the years from year 12 to year 14 there was a fluctuation. In year 12 the short- term investments was 150,000 and increased 30,00 to 180,00.

By year 14 that figure decreased again by 150,00 to Just 30,000. This tells the SCOFF that the company is investing less of the company’s assets by year 14. They may not be as confident in their investing decision like they were in previous years. In year 12 the company had 75,420 on that expense. That dropped to 70,560 in year 13 and eventually increasing slightly to 71,460 in year 14. The decreasing in accounts and notes give the indication that the company is slowly paying off debts. Decreasing Total Long Term Liabilities The total long-term liabilities show a decrease every year.

Year 12 it was 860,000 and dropped to 805,000 by year 13 and finally dropping again to 750,000. This tells the SCOFF that the company is paying off debt every year. Decreasing Total Liabilities The total overall liabilities of the company also show a consistent decrease over the three years. Year 12 the total was 990,420 dropping to 930,560, and landing at 876,460 in year 14. This tells the SCOFF that the company is not accruing any more debt year after year but rather paying off the company’s existing debt. Equity The company is showing increase in the company’s equity.

In year 12 the total decoder’s equity is 756,451 and increased to 808,351, and increasing even more in year 14 to 822,826. With all the information provided it is safe to say that the potential for the balance of debt to profit ratio will be changed and investors will most likely drop out of the company. Custom Snowboards Inc. Must overhaul their budget sheets to show that they are fiscally responsible and can pay back a large loan from the bank. AY. Risks There is no existing company that does not take risks. Risks can be viewed as a handling important decisions.

If not adequately thought out there are risks that can pipe out any company and cause damage such as lost Jobs, lost revenue and/or bankruptcy of the company. The risks that need to be put in the spotlight for the SCOFF are the following: Risk #1 General & Administration cost increase over 3 years. This increase in pay for employees lowered the operating income dramatically. If this expense continues in the same behavior the company has the potential to not be able to make their interest payments in the future. Mitigate Risk #1 To mitigate this risk it is wise for Custom Snowboards Inc. O evaluate these costs and determine if they are still warranted. After the evaluation of these costs immediate elimination of any unnecessary or unwarranted expenses must be executed. Risk #2 Total Current assets exceed total current liabilities is a good indication that executives are not utilizing assets to the company’s advantage. There is always room for improvement even though the company has a relatively good working capital. Mitigate Risk #2 Accounting managers should evaluate the assets and determine how that money can be used to improve other areas of the budget or improve the company’s working capital.

Risk #3 The current operating income is low and gives the notion that working in the new European market is near impossible. The operating income decreased over the last 3 years because of increased expenses the idea of adding in the European Market could strain the company’s budget and wipe out what little income they have. Mitigate Risk #3 First and foremost management needs to make changes operating expenses. Maybe decrease transportation cost or eliminate the big fat raise executives gave themselves. Risk #4 The current long-term liabilities are lower when compared to the other liabilities the company has and their assets.

However, there is always room for improvement. If he current liabilities are low tells the banks that the company is lower risk to loan money to. Mitigate Risk #4 To make continued improvement Custom Snowboards could find ways to decrease their current liabilities to help improve the position of the company. For example, they can find ways to save money in the budget by eliminating any excess materials. Risk #5 While no one can really predict an economic recession a company can accurately forecast future sales based on previous years and latest trends in the market.

The sales over the last 3 years show some fluctuation. This shows that the company is not repairing well for the high seasons and not forecasting accurate predications of sale trends. Mitigate Risk #4 Custom Snowboards needs to try to hire a third party accountant to accurately go through pro-formal statements, and past sales numbers to give a non-partial analysis of what is to come for future sales. Risk #5 Custom Snowboard Inc. Mitigate Risk #5 There are several ways to create increased income to cover the added expenses of increased production. For example, making sure the new Snowboards are appropriately priced.

Look for ways to save on transportation cost such as using alternative fuels. Risk #6 Risk of Foreign operations is a risk that not too many people think about until there are already in the middle of an operation. The clash between the culture and laws of the land may directly affect a company. For example, the import/export duties may be different, or the wage requirements may be higher than it is in the US. Mitigate Risk To mitigate this risk several research studies must executed to determine Just which risks of foreign operations will directly affect the company’s goal and overall profits.

AY. Ratio Analysis Current Ratio We can break down the ratios by the financial statements provided. The current ratio is an analysis a lender can use to determine the risk it will take if it chooses to lend money to a current company. This is essential because a company’s current ratio is used to determine if the company can pay back its short-term liabilities with their short-term assets. The higher the current ratio is the better of a chance they have in paying back the money they owe. For example if a company had a ratio of under 1 that doesn’t bode well for the company at all.

That tells us that the company has less than 1 dollar for every dollar that they currently owe. To find a company’s current Asia you must take the company’s current assets and divide it by their current liabilities. (Investigated US 2014) In the case of Custom Snowboards Inc. They had a current ratio of 6. 68 in year 13 and 5. 53 in year 14. The higher figure in year 13 is the more desirable current ratio. It means for every dollar the company owes it has over 6 dollars. Compare this number to year 14 where they only have 5 dollars for every dollar owed and the overall Winter Sport Industry has a current ratio of 4. 0 in year 14. That means the entire Winter Sports industry has 4 dollars for every dollar in debt they owe. Acid Test Ratio The Acid-test ratio is another analysis a lender can use to determine if a company is financially healthy enough to lend money to. It is used to make sure a company can quickly pay off the money they owe without having to wait for inventory to sell. You can determine a company’s acid-test ratio by taking their immediate assets and divide that by their liabilities. The immediate assets like cash+accounts receivable *short term investments. (Investigated US 2014) In the case of Custom Snowboards Inc. Heir acid test ratio for year 13 was 4. 52 and the following year it dropped to 3. 32. Compared to the Winter Sports Industry has an acid test ratio of 3. 40. This translates to the company has the ability to pay off liabilities and still have enough money left over to run the day to day business operations. Debt Ratio The Debt Ratio is another ratio used to measure a company’s financial health. Simply taking the company’s total debt and dividing by total assets is how you find the debt ratio. (Investigated US 2014) Custom Snowboards Inc. Has a debt ratio of 53. 5% for Industry of only 38%.

This ratio will help determine if Custom Snowboards Inc. Has a healthy financial to loan money to. They do not want a high ratio. Since their debt ratio dropped in year 14 this tell us that the company was able to pay off debt, which can indicate strong financial implementation. Having mentioned that the debt ratio is worse when compared to Winter Sport Industry at 38%. Operating Profit Margin The Operating Profit Margin is used to determine a company’s revenue after they pay all of their operating costs or overhead. Some of that variable cost may include employee wages, raw materials, and interest paid on debt.

You can find this margin by taking the company’s operating income and dividing it by the company’s net sales. (Investigated US 2014) Custom Snowboard Inc. As an operating profit margin of 2. 3% in year 13 and 1. 5% in year 14. Compared to the 5. 2% Winter Sports have. The lower the figure means less money to cover the company’s debts. Since Winter Sports has a higher margin at 5. 2% they have a better chance of paying operation cost while making a profit. Net Profit Margin The Net Profit Margin is a way to compare two very similar companies like Competition Bikes and Two Wheel racing.

One can find the net profit margin by taking the net profits and dividing it by the sales. It works really well determining just how successful a company is. It does not however work for a company that is goosing money and not making any profits. A company must be making some kind of profit to have a net profit margin. (Investigated US 2014) In this case Custom Snowboards Inc. Wants a higher figure. The higher the figure in this margin means the better the company is doing. In year 13 Custom Snowboards Inc. Has a net profit margin of 0. 8% and 0. 2% in year 14. Compare that TTT. % of Winter Sports means that Winter Sports is ahead of the game when it comes to net profit margin and is doing much better than Custom Snowboards Inc. Return on Total Assets The Return on total assets is another ratio that is used to determine a company’s earnings. One can find this ratio by first taking the sum of the company’s net income, interest expenses, and taxes. After finding that sum take the total and divide it by the company’s total net assets. (Investigated US 2014) Custom Snowboards Inc. Wants a higher number when it comes to return on total assets.

In year 13 the return on total assets for Custom Snowboards Inc. Was 3. 0% and dropped to 0. 9% in year 14. Compare that to 4. 8% for Winter Sports industry. A higher figure may tell the bankers that the company is very strong and they are making money in other faucets of the company not Just sales. Unfortunately, Custom Snowboards Inc. Dropped their return on total assets from year 13 to year 14 and the Winter Sports Industry is far ahead of the game with 4. 8% Times Interest Earned The Times Interest Earned is how a company is able to measure its ability to pay back its debt that is owed.

One can find a company’s Times interest earned by taking the earnings before interest and tax BIT divided by the total interest payable on bonds and other debt the company may contractual owe. (Investigated US 2014) Custom Snowboards Inc. Has the times interest earned of 1. 83 in year 13 and 1. 25 in year 14. Compared to the 5. 10 the Winter Sports Industry has. Banks find this figure very given for the times interest earned the Winter Sports Industry have better budgeting practices that allow them decrease their debt. Bal . Historical Analysis Income statements Historical Analysis: Revenue: Custom Snowboards Inc. Experienced a steady decline in their revenue from year 12 to year 14. The revenue is comprised of the net sales of the cost of goods sold and gross profits. The revenue went down from 2,053,100 in year 12, 1,920,800 in year 13, and 1,945,300 in year 14. Overall these figures tells us that the ales are declining year after year and not maintaining the progress they made in year 12. Operating expenses: Are most of the expenses that occur when selling the actual snowboards, like transportation, sales commissions, advertising campaigns, and employee sales training. In year 12 the company spent 796,100, in year 13 744,800, and 754,300 in year 14.

These figures tell us that the budget has relatively stayed steady. In year 12 they spent about 50,000+ more in operating expenses. That could have been due to some kind of training they had employees go through that year. Or the increase could have been due to some kind of inflation. General & Administration expenses: saw a huge increase thought out the years. While compensating hard work from employees is important there needs to be increased sales, profits to Justify and fund raises to employees and executives. From year 12 to year 14 administrative payroll Jumped 40,000.

What is worse is during that same time period executive compensation Jumped 25,000. There are far few less executives than there is administration staff which means the “higher up guys” saw bigger raises than the other staff members. Utilities climbed each year which is normal behavior is more snowboards are being sold. Operating Income: Decreased significantly from year 12 to year 14. In year 12 the operating income was 296,500 and somehow dropped to 146,00 the following year, and 94,00 in year 14. This decrease in operating income is caused by the increased expenses in operations. Custom Snowboards Inc. Just evaluate employee’s compensation and work really hard to increase operating income to be able to show the bankers they have a strong financial future. Interest Income & Payments: While the company is making money through their investments through it is also paying out interest payments for their outstanding debt. In year 12 the company made 2,500 in interest payments but paid 85,000. In year 13 the company 32,000 in interest and paid 80,000 in payments, and in year 14 they made only 300 in interest income and paid 75,000 in interest payments. In year 14 the company had a major decrease in short -term investments.

Balance Sheet: Current Assets: The total current assets for year 12 was 746,871 and saw an increase in year 13- 838,911, and then a decrease in year 14 to 699,286. The short-term debt also saw fluctuation going from 150,00 in year 12 to Just 30,000 in year 14. Also the cash and cash equivalents went from 121,000 in year 12 to 198,413. Accounts receivable was 202,377 in year 12 and dropped to 191,751 in year 14. If sales increase the accounts receivable should increase as well. If not these figures tell us that the company has troubles with getting their products sold quickly.

The company & Equipment Costs: Stayed the same from year 12 to year 13. However, there was a slight Jump in year 14 to 1,400,000. The company buying new furniture caused this. This increased may have actually hurt the company because of lack of sales in year 14. Maybe they should have stuck with their old furniture and waited to buy new furniture until they reached a year with higher sales. It should be noted that the company did pay with cash for the furniture and didn’t buy the furniture while gaining more debt. Total Assets: have decreased from year 12 to year 14. Year 12 it was 1,746,871 and dropped to 1,699,286.

The decrease in total assets indicates that the company is not as financially strong as it used to be. Better measures needs to be taken to ensure the company’s assets do not fall further. Current Liabilities: all include notes payable, current portion of long and total current liabilities. The company has seen a steady decrease in total liabilities from year 12 to year 14. The current portion of long-term debt is the same through out all 3 years at 55,000. The company is decreasing their debt slowing with the decline in the notes payable. Long Term Liabilities: Are mortgages payable and other long-term liabilities.

The figures from year 12 to year 14 show a constant decline, year 12 990,420, year 13 930,560, and year 14 876,460. This is an indication that the company is working to paying off its debt. However, if the company was utilizing its assets more efficiently Custom Snowboards could cover more of the long-term debt quicker. Stockholder Equity: Is he company’s common stock, paid in capital, and retained earnings. From year 12 to year 14 the common stock & paid in capital stayed the same. While the retained earnings went from 156,451 to 222,826. The increase in retained earning could have come from sales, and decreasing debt.

The stockholder equity seems to be increasing every from 756,451 in year 12 and Jumping to 822,826 in year 14. This happens because of increased retained earnings. Total Liabilities & Equity: These figures show a decline from year 12- 1,746,871 to 1,738,911 in year 13 and 1,699,286 in year 14. These declines show the business may be struggling. If the company would do more to manage their liabilities and equities to their advantage the company could be a lot more successful. Blab. Future Performances Using the company’s history is a valuable tool for Custom Snowboards Inc. O predict the future performance and profitability. This information is vital for the company to even contemplate the idea of expansion. According to the Trend Analysis data given the company is taking the information from years 12-14 to predicate what the future of the company is like during years 14-17. The net sales are as follows: year 12 year 13 year 14 Forecasted sales: ear 15 year 16 year 17 decrease of 93. 6%. For year 14 they saw a 94. 7% increase. Which was also a 101. 3% increase from the previous year. These trends show us that the company can project a 99%-101. 7% increase over the years.

The company shows an increase in net sales year after year with the exception of year 13. Custom Snowboards Inc. Relies on these forecasted sales to come from major sporting events, competitive sporting, and other events. They may increase their sales prices to help lower the effects of the downturn economy on the company. I would highly recommend the company start o utilize activity based costing in order to see which models are making the most money to increase profitability. This way the company can distribute money more efficiently if they need additional advertising help to boost sales or high better management to oversee production.

Another way the company can help future performances is to base salaries and raises on company performance. There are more incentives for employees to continue to have more lucrative years if the company performs well in the market. Maybe switch to commission sales or a fluctuating salary depending on quarterly sales. Also, the company needs to diminish ash and cash equivalents in the future by paying off long term debt and investing in company improvements and marketing to gain more customers.

Finally, if the company can make internal changes to build the business with a consistent 2-3% net sales increase over the next few years will yield a higher net income than previous years. The trend analysis shows only what the potential of Custom Snowboards could be in the future with its current internal infrastructure?? It is not a guarantee and only through hard work and determination that the increased sales over time will happen. 82. Improvement There is always room for improvement in any company. Custom Snowboards Inc. Should be no exception.

From the data given Custom Snowboards lacks in operational expenses. Currently the company is lumping its expenses together using a traditional based costing method to determine the cost associated with the production of their snowboards. A traditional Based costing method is basically lumping expenses together under one overhead item and getting the cost for product. While some companies find this method useful and effective, the expanding needs of Custom Snowboards Inc. Needs to find a more accurate way to determine ND forecast production and profits.

Activity Based Costing Method Activity Based Costing method itemizes the manufacturing overhead to give a more accurate figure. This is will give Custom Snowboards Inc. The ability to see where adjustments need to be made in order to be profitable and efficient. For regular snowboards & custom snowboards the price for materials & labor is the same in both traditional based costing and Activity based costing. For regular snowboards 3,375,143 and personalized is Using traditional costing methods Custom Snowboards charges a large amount for manufacturing overhead: Regular del?I Personalized = 334,048.

Making the TOTAL snowboard production cost: Regular model = 4,444,125 Personalized = However, with the Activity Based costing method the company breaks all the manufacturing expenses down: Factory Setups Engineering Services Product Movements Packages & Shipping Overhead cost unallocated to activity cost pools Miscellaneous Items Based on theses figures the company has a manufacturing overhead: = 546,863 personalized = 856,167 Total Production Costs (BBC): Regular model = personalized = Regular model Figures like these give the impression that Custom Snowboards Inc. s spending a lot f money in areas they could be saving in the regular and personalized snowboards. Factory set up are more than 181 ,316 for the personalized models than the regular models. Which makes sense since it takes a lot more effort to make a custom model than to mass produce Just one regular snowboard. Quality control & engineering services are also more given the nature of custom manufacturing. However, the packaging & Shipping for the regular models exceed the custom models packaging and shipping.

Over 200,000+ is spent which is effecting the company’s ability for a strong return on investment. While the custom snowboards are 80% of the sales output and only costs 66,516 to ship. Custom Snowboards Inc. Should utilize activity based costing to further build a strong company with a bright future. Finally another cost saving measure that can be implemented is the “Just In Time” method. This method can greatly help reduces excess materials or products and help Custom Snowboards Inc. Save money, time, and labor.

The principals to the “Just In Time” method uses the idea of not ordering materials or products unless the company needs them immediately. It helps the company keep the money in the bank instead of sitting in warehouses as unused inventory. This method also helps the company recast more accurate sales numbers and evaluate further Just how much materials they will need. The company had an excess of 143,136 in unsold inventory at the end of year 14 and based on a trend analysis has no plans for improving this number. The company need doesn’t need extra materials and products listed under company assets.

Instead they need more figures that will produce better net income. 82. Internal & External Risks Internal risks are risks that the Custom Snowboards Inc. Can control from the inside of their infrastructure. External risks are risks that are beyond the control of anyone in the company. For example natural disaster, or plant fire, these are normally risks that are unpredictable and uncontrollable. Because of both internal and external risks it is wise for any company to prepare for the anything and everything that may affect the company.

A few examples of internal risks are: Staff strikes or walk out Language or Cultural barriers Miscommunication between executives and lower end workers A few examples of external risks are: Currency exchange rates Foreign economic risks International legal risks Good and proper management of the company will virtually eliminate the potential for a staff strike or walkout. A company that treat its employees well, with good working environments and are well compensated not only in salary but medical and retirement benefits, will see happier and healthier employees.

Which translate into a harmonious company working hard toward the same goal. Language and Culture barriers may exist enter a new market. Managers and other higher level staff may want to educate themselves on the culture of land, such as maybe religious or national holidays. Taking appropriate education courses or hiring a local expert to translate work place expectation can eliminate miscommunication between executives and lower end workers. Natural disasters happen every day across the globe. Finding the least likely of places a natural disaster will occur is the first step in avoiding company loss.

Also buying proper insurance to make sure the company is covered in case of a natural disaster. To avoid currency exchange rates and foreign economic risks Custom Snowboards must consider different currencies that are available and the exchange rates from one to another and back to US dollars. These rates are always changing and it is vital for the company to keep a close eye on it to make sure the company isn’t loosing money. Just like the United States there are law hat protect consumers and companies the laws in Europe may be similar but should be studied and evaluated so the local laws are not mistakenly broken and cause the company harm.

Baa. Recommendations Custom Snowboard Inc. CEO Report: Mitigation recommendations: Internal Risk #1 Staff strikes or walk out Like mentioned in the previous section treating employees well so there is no reasons for a strike. Recognition of hard work goes a long way. Staff member should be rewarded for a Job done well. Internal Risk #2 Language and/or Culture barriers Extensive studies and should be done by upper level management and hiring angers before the plant in Europe opens. Also, hiring a local expert may give insight to managers that were not otherwise foreseen.

Internal Risk #3 Miscommunication Formal protocols and procedures must be implemented and proper training must be given on those protocols and procedures. In efforts to further understand the needs of the staff some testing and surveys should be randomly given to staff members through out the year. External Risk #1 Natural Disasters Like mentioned in the sections above to the SCOFF proper insurance policies should be purchased to ensure that the plant and operation are protected against disasters.