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Balance Sheets & Income Statement

Bio-Pure Food Company

Gary Green has recently inherited some money and is interested in investing in a small company with some growth potential.  Last week he ran into William White, and old friend from his college days and they had lunch together.  In the course of the conversation, William mentioned that Bobby Brown, one of the stockholders a company that William is a shareholder in, has recently experienced some serious financial problems  and is in need of cash.  Bobby  wants to sell his stock in the company (approximately 15% of the shares).  Bio-Pure produces and markets barbecue sauces, ketchup, mayonnaise, mustard, and salad dressings made with all organically grown ingredients and absolutely no chemical additives.  The products are distributed primarily through upscale retailers like Whole Foods Market and Trader Joe's.  The company has grown rapidly over the last three years with a growth rate of 25% per year compared to the average growth rate of other firms in the industry of 10 - 12% a year over the same time period.

The balance sheet and income statement figures for the last three years are shown below, along with the industry ratios averages for the same time period.  You are to assume that the annual economic growth rate has been between 3 and 4 percent for the period i.e., do not consider recent economic conditions.

Bio-Pure Food Company   - Income Statements

 

2010

2011

2012

Sales (all sales are on credit)

2,400,000

3,000,000

3,750,000

Cost of goods sold

1,600,000

2,080,000

2,620,000

Gross Profit

   800,000

   920,000

1,130,000

Selling and administrative expenses1

   479,800

   548,000    

   609,400

Operating profit (EBIT)

   320,200

    372,000  

   520,600

Interest expense

     70,000

      90.000

   170,000

Net income before taxes

   250,200

     282,000

   350,600

Taxes

     73,800

       98,400

    112,200

Net income

   176,400

      183,600

     239,400

Shares outstanding

       60,000

       60,000

      76,000    

Earnings per share

2.94

3.06

3.15

Includes 195,000 in lease payments for each year

Bio-Pure Food Company  - Balance Sheets

 

2010

2011

2012

Assets

 

 

 

Cash

   60,000

80,000

   60,000

Accounts Receivable

 380,000

568,000

 780,000

Inventory

 460,000

522,000

  580,000

     Total Current Assets

  900,000

1,170,000

1,420,000

Plant and equipment (net of depreciation)

1,300,000

1,530,000

2,780,000

Total Assets

2,200,000

2,700,000

4,200,000

 

 

 

 

Liabilities and Stockholder's Equity

 

 

 

Accounts payable

  400,000

  620,000

1,010,000

Accrued expenses

    40,800

    60,000

    70,000

Total current liabilities

   440,800

  680,000

1,080,000

Long-term liabilities

   650,000

  727,200

1,407,800

     Total liabilities

 1,090,800

1,407,200

2,487,800

Common stock ($2 par value)

    120,000

   120,000

   153,000

Capital paid in excess of par value

    380,000

   380,000

   528,000

Retained earnings

    609,200

   792,800

1,032,200

     Total stockholder's equity

  1,109,200

 1,292,800

 1,712,200

Total liabilities and stockholder's equity

  2,200,000

  2,700,000

 4,200,000

 

Industry Ratios

 

2010

2011

2012

Sales growth

--

10%

12%

Profit margin

7.71%

7.82%

7.90%

Return on assets

7.94%

8.86%

8.95%

Return on equity

14.31%

15.26%

15.85%

Receivables turnover

9.02X

8.86X

9.31X

Average collection period

39.9 days

40.6 days

38.7 days

Inventory turnover

4.24X

5.10X

5.11X

Fixed asset turnover

1.60X

1.64X

1.75X

Total asset turnover

1.05X

1.10X

1.12X

Current ratio

2.00X

2.25X

2.40X

Quick ratio

1.39X

1.41X

1.38X

Debt to total assets

43.20%

43.11%

44.10%

Times interest earned

6.50X

5.99X

6.61X

Fixed charge coverage

4.70X

4.69X

4.73X

Growth in earnings per share

--

9.95%%

12.82%%

Gary Green has asked you to do a complete analysis of the firm's financial condition and determine whether or not you think he should invest in this firm. The firm has not paid any cash dividends are there are no plans to do so in the foreseeable future.  Thus, any returns an investor will earn must come from selling the stock in the future. Of course, Michael's primary interest is in the profitability of the firm but he has requested a thorough analysis to include ratios for each year and a comparison to the industry.

What comments will you make and what recommendations do you have for Gary Green ?  Please keep in mind that he wants to see all of the "numbers".

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