Integrated Case

2819 Words Oct 30th, 2012 12 Pages
Integrated Case

4-25

D’Leon Inc., Part II

Financial Statement Analysis
Part I of this case, presented in Chapter 3, discussed the situation of D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to “go national.” Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2008 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm’s survival. Donna Jamison was brought in as assistant to Fred Campo, D’Leon’s chairman, who had the task of getting the company back into a sound financial
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Ratio Analysis 2009E Current Quick Inventory turnover Days sales outstanding (DSO)a Fixed assets turnover Total assets turnover Debt ratio TIE Operating margin Profit margin Basic earning power ROA ROE Price/earnings Market/book Book value per share 2008 1.2 0.4 4.7 38.2 6.4 2.1 82.8% -1.0 -2.2% -2.7% -4.6% -5.6% -32.5% -1.4 0.5 $4.93 2007 2.3 0.8 4.8 37.4 10.0 2.3 54.8% 4.3 5.6% 2.6% 13.0% 6.0% 13.3% 9.7 1.3 $6.64 Industry Average 2.7 1.0 6.1 32.0 7.0 2.6 50.0% 6.2 7.3% 3.5% 19.1% 9.1% 18.2% 14.2 2.4 n.a.

Note: “E indicates estimated. The 2009 data are forecasts. a Calculation is based on a 365-day year.

A.

Why are ratios useful? What are the five major categories of ratios?

Answer:

[S4-1 through S4-5 provide background information. Then, show S4-6 and S4-7 here.] Ratios are used by managers to help improve the firm’s performance, by lenders to help evaluate the firm’s likelihood of repaying debts, and by stockholders to help forecast future earnings and dividends. The five major categories of ratios are: liquidity, asset management, debt management, profitability, and market value.

B.

Calculate D’Leon’s 2009 current and quick ratios based on the projected balance sheet and income statement data. What can

you say about the company’s liquidity positions in 2007, 2008, and as projected for 2009? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and
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