Assignment:
Our intrepid investment advisor, Uncle Sal, is recommending that Granny invest in his latest hot stock pick. Granny has asked Sal to provide her with a ratio analysis of his pick, Fluffy’s Cat Farms (ticker: FCF) traded on the Cat and Dog Exchange. Granny is considering buying a $50,000 stake in FCF at a buy-in price of $2 per share. Sal has the following financial information, obtained from the last 10K filing of FCF with the SEC:
|
Fluffy's Cat Farms (A Delaware Company)
Income Statements for Periods Ending as Indicated
Audited by Sal's General Accounting and Consulting Services
(Values in thousands)
|
|
2001
|
2002
|
2003
|
2004
|
|
Sales
|
100
|
180
|
150
|
200
|
|
Cost of Sales
|
60
|
117
|
97.5
|
136
|
|
Gross Profit
|
40
|
63
|
52.5
|
64
|
|
Rent
|
5
|
5
|
5
|
5
|
|
Utilities
|
2
|
3
|
4
|
4
|
|
SG&A
|
10
|
15
|
20
|
30
|
|
Depreciation
|
10
|
10
|
30
|
35
|
|
Total Fixed Costs
|
27
|
33
|
59
|
74
|
|
EBIT
|
13
|
30
|
(6.5)
|
(10)
|
|
Interest
|
10
|
10
|
3
|
3
|
|
Earnings Before Taxes
|
3
|
20
|
(9.5)
|
(13)
|
|
Taxes (35%)
|
1
|
7
|
0
|
0
|
|
Net Income
|
2
|
13
|
(9.5)
|
(13)
|
|
Fluffy's Cat Farms (A Delaware Company)
Balance Sheet for Periods Ending as Indicated
Audited by Sal's General Accounting and Consulting Services
(Values in thousands)
|
|
|
2001
|
2002
|
2003
|
2004
|
| Assets |
|
Inventory
|
10
|
10
|
10
|
10
|
|
A/R
|
100
|
200
|
300
|
350
|
|
Short Term Notes
|
10
|
10
|
10
|
0
|
|
Total Current Assets
|
120
|
220
|
320
|
360
|
|
Long Term Assets
|
100
|
100
|
300
|
350
|
|
Cumulative Depreciation
|
10
|
20
|
50
|
85
|
|
Net Long Term Assets
|
90
|
80
|
250
|
265
|
|
Total Assets
|
210
|
300
|
570
|
625
|
|
Liabilities
|
|
Accounts Payable
|
50
|
77
|
200
|
150
|
|
Notes Payable
|
0
|
0
|
30
|
82.5
|
|
Total Current Liabilities
|
50
|
77
|
230
|
232.5
|
|
Long Term Bonds
|
50
|
100
|
176.5
|
200
|
|
Total Liabilities
|
100
|
177
|
406.5
|
432.5
|
|
Equity
|
|
|
|
|
|
Common Stock
|
108
|
108
|
158
|
200
|
|
Retained Earnings
|
2
|
15
|
5.5
|
(7.5)
|
|
Total Equity
|
110
|
123
|
163.5
|
192.5
|
In addition, Sal goes to the C&D Data Services and pulls the following data from their website for ratios of the leading big-10 cat farms in the United States:
Current Ratio: 2.0
Quick Ratio: 2.2
Debt to Equity (D/E): 2.5
TIE: 2.0
RONA: 35%
Gross Profit: 35%
Net Profit: 10%
Inventory Turns: 3
Now, based on a ratio analysis, give Granny the following advise:
a. What is your assessment of the management of FCF?
b. What are some likely explanations for the decline in profits over the last two years?
c. What other major trends do you see for FCF and what do they mean for the future of FCF?
d. Do you recommend FCF as an investment for Granny?
Please note that a ratio analysis requires several steps:
1. Compute the ratios, showing how you did it (what formula, where you got the data from, etc...)
2. Compute ratios for several years of data.
3. Check trends in the ratios (how they change over time).
4. Identify what the ratios mean and how their changes reflect management strategy.
5. Check your conclusions (step 4) against the raw financial data to see if you can explain what's going on.
6. Compare the most recent data to the industry data.
7. Make a final conclusion on the direction of management and the suitability of this investment for your client.