Read:
Case 3.2 Gardiner Wholesalers Incorporated (A)
Do:
Ratio Analysis for Elegance Jewellers similar to S.D. Taylor Jewellers on page 132
And remember, for every 10% decrease in price, volume of goods sold has to increase by 25%!
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3 comments:
I can't be at class tomorrow night, but this is what I got for the homework ratios:
Elegance Jewellers Inc.
Ratio Analysis
for the years ending June 30
2002 2001
Sales 100% 100%
COGS 47.7% 45.0%
Gross income 52.3% 55.0%
Operating expense 38.7% 36.5%
Operating income 13.6% 18.5%
Other income (0.6%) (0.6%)
Interest expense 7.7% 2.0%
Net earnings 4.0% 11.9%
ROE 11.0% 11.9%
Current ratio 5.1:1 1.8:1
Acid test 0.2:1 0.02:1
Working capital 969.3 517.5
Age of rec 8.0 days 1.9 days
Age of inv 446.1 days 541.6 days
Net worth 32.0% 46.8%
Interest coverage 1.7x 8.9x
2001-2
Growth 15.2%
Profit/income (61.4%)
Assets 52.4%
Equity 4.1%
Comparing these to the ratios for SD Taylor Jewellers, I noted that:
- Interest expense is high
- Net earnings are trending low
- ROE is much lower than Taylor
- Age of rec is lower but age of inv is much higher
- Net worth is low
- Interest coverage is very low
- Working capital is quite high, but profit is way down from last year
Comparing to the industry standards Kathy Wilson had access to:
- Age of rec is 19.9 days for Taylor, 8.0 days for Elegance and 4.7 is the industry standard
- Current ratio is 2.05:1 for Taylor, 5.1:1 for Elegance, and 1.6:1 is the industry standard
- Net worth is 61.1% for Taylor, 32% for Elegance, and the industry standard is 41%
My very tentative conclusions are:
- SD Taylor is in better financial shape than Elegance
- Elegance has a problem with interest coverage on its existing debt, with high working capital and high inventory... they need to move some existing inventory and service some existing debt before taking on much more, I think
I think Kathy might note SD Taylor's file as just fine, but flag Elegance's file to be cautious in extending further credit.
What did everyone else think?
I agree - while SDT should do a better job of going after recievables, Elegance has too much inventory sitting around and is paying too much debt. SDT is the better choice as their problems are much more easily resolved than Elegance. Go Mom&Pop!
Hi Jan:
You're numbers are correct - we went over this case a bit yesterday and you were bang on. Go Mom&Pop!
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