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Case Study
Thunder Electronics Company SA (TEC)
(Topic: Financial ratios; trend analysis and industry comparisons)
Thunder Electronics Company SA (TEC) is a leading supplier of computer related products, including servers, workstations, storage devices, and network switches.
Although Thunder Electronics is not one of the giants of the industry, it is a medium-sized well managed company selling its high quality electronics to customers both in private industry and state owned organizations.
Bob Scott President and CEO of TEC following the 2012 Year-end results, called for an urgent meeting to evaluate TEC’s performance for the year and discuss further actions to be taken to sustain the growth pace of TEC.
In addition it became mature to inform his management team about the interest expressed recently for cooperation from some important financial organizations in the region and how to proceed with their representatives.
In fact those organizations’ analysts are currently reviewing Thunder Electronics’ financial situation in the past three years. Each reviewer has distinct interests.
During that meeting Bob in his opening speech, focused on analyzing TEC’s sales performance and how it compared to the industry as a whole, pointing out the following:
“Fiscal year 2012 was clearly a mixture of threats and opportunities for TEC, as well as for the industry, and the economy as a whole. Still, we finished with revenue growth of 25% and that’s significant, if we take into account that industry growth rate in sales is only 10 to 12 percent per year. We believe it’s a good indication that TEC continued to pull away from the threats and gain market share. For that, we owe a debt of gratitude to our employees, who aggressively brought costs down— even as they continued to bring more sales by selling more of existing products and by introducing new ones to the market”.
At this point one of the executive members in the meeting-the VP Finance- whispered to his colleague the financial controller who was sitting next to him. “He mentions nothing about the profits earned during the period of the last three years and how they compare to sales growth for same time period”. Financial controller took the lead and loudly addressed the CEO saying “I agree all that about sales is good stuff; But what about the profits?
CEO Scott paid no attention to their comments and continued saying. “Based on our company’s good performance for some time now, I have been approached by several entities, whose interests vary, seeking to cooperate for mutual business benefits.
He continued saying that in principle he agreed with these entities to allow them gather all financial information related to TEC’s performance for the period 2010 – 2012, as long as these information are publicly available and known.
As the matter of fact he added; these entities have been provided –for the same time period- with the company’s financial statements accompanied with selected financial ratios, and they have already appointed their teams of analysts to evaluate and assess our company’s performance for the period 2010 – 2012.
Specifically, the financial data accessible to the analysts are limited to our company’s income statements (shown in Exhibit 1), balance sheets, (shown in Exhibit 2), and selected financial ratios of our company as they compare with those of the industry’s (presented in Exhibit 3).
He then, presented the entities that are presently reviewing Thunder Electronics’ financials and stressed that the company is expecting each of the parties to recommend an action based on the evaluation of Thunder Electronics’ financial position.
He also mentioned that Thunder Electronics has provided the requested information to the analysts of each entity on a strictly confidential basis.
The entities reviewing currently Thunder Electronics’ financials and their representatives are the following:
Middle- State Bank: The bank is processing Thunder Electronics’ application for a new five year loan. West-City Bank has been Thunder Electronics’ banker for several years but must evaluate the company’s financial position for each major transaction.
Majestic Company: Majestic is a new supplier to Thunder Electronics and must decide on the appropriate status to be assigned to TEC and consequently the credit terms to offer to the TEC Company. The person in charge is Mr. George Meckler; assistant controller. TEC’s assessment focuses on answering the question whether it qualifies to be registered as a strategic client for Majestic.
Investment Trust: A brokerage firm specializing in stocks of electronic firms. Investment Trust must decide if it will include Thunder Electronics in a new proposed portfolio of attractive shares for LT investment being established for the sale to Investment Trust’s clients. The person in charge is Ms Linda Brown; analyst.
At the end of the meeting all participants agreed that management of Thunder Electronics needs to continue taking actions towards improving the financial strengths and abolish temporary weaknesses of the company to take advantage of the business opportunities open from the three entities as well as to sustain ‘healthy growth’. They also agreed that the feedback expected from the reviewing entities will be helpful to this end.
Exhibit 1
|
Thunder Electronics Company SA (TEC) |
|||
|
Income Statements
|
|||
|
2010 |
2011 |
2012 |
|
|
Sales (all on credit)……………………………………… |
$1,200,000 |
$1,500,000 |
$1,875,000 |
|
Cost of goods sold……………………………………….. |
800,000 |
1,040,000 |
1,310,000 |
|
Gross profit……………………………………………….. |
$ 400,000 |
$ 460,000 |
$ 565,000 |
|
Selling and administrative expense*……………… |
239,900 |
274,000 |
304,700 |
|
Operating profit (EBIT)………………………………… |
$ 160,100 |
$ 186,000 |
$ 260,300 |
|
Interest expense…………………………………………. |
35,000 |
45,000 |
85,000 |
|
Net income before taxes……………………………. |
$ 125,100 |
$ 141,000 |
$ 175,300 |
|
Taxes…………………………………………………………. |
36,900 |
49,200 |
55,600 |
|
Net income……………………………………………….. |
$ 88,200 |
$ 91,800 |
$ 119,700 |
|
Shares……………………………………………………….. |
30,000 |
30,000 |
38,000 |
|
Earnings per share………………………………………. |
$ 2.94 |
$ 3.06 |
$ 3.15 |
|
*Includes $15,000 in lease payments for each year. |
|||
Exhibit 2
|
Thunder Electronics Company SA (TEC) |
|||
|
Balance Sheets
|
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|
Assets |
2010 |
2011 |
2012 |
|
Cash………………………………………………………….. |
$ 30,000 |
$ 40,000 |
$ 30,000 |
|
Marketable securities………………………………….. |
20,000 |
25,000 |
30,000 |
|
Accounts receivable…………………………………….. |
170,000 |
259,000 |
360,000 |
|
Inventory……………………………………………………. |
230,000 |
261,000 |
290,000 |
|
Total current assets…………………………………. |
$ 450,000 |
$ 585,000 |
$ 710,000 |
|
Net plant and equipment……………………………… |
650,000 |
765,000 |
1,390,000 |
|
Total assets……………………………………………….. |
$1,100,000 |
$1,350,000 |
$ 2,100,000 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
Accounts payable………………………………………… |
$ 200,000 |
$ 310,000 |
$ 505,000 |
|
Accrued expenses……………………………………….. |
20,400 |
30,000 |
35,000 |
|
Total current liabilities…………………………….. |
$ 220,400 |
$ 340,000 |
$ 540,000 |
|
Long-term liabilities……………………………………. |
325,000 |
363,600 |
703,900 |
|
Total liabilities………………………………………… |
$ 545,400 |
$ 703,600 |
$ 1,243,900 |
|
Common stock ($2 par)……………………………….. |
60,000 |
60,000 |
76,000 |
|
Capital paid in excess of par………………………… |
190,000 |
190,000 |
264,000 |
|
Retained earnings……………………………………….. |
304,600 |
396,400 |
516,100 |
|
Total stockholders’ equity…………………………. |
$ 554,600 |
$ 646,400 |
$ 856,100 |
|
Total liabilities and stockholders’ equity…….. |
$1,100,000 |
$1,350,000 |
$2, 100,000 |
Exhibit 3
Thunder Electronics Company SA (TEC)
(Key Financial Ratios vs Industry)
|
Group of ratios |
Name of ratios |
(TEC)/Electronics Industry |
2010 |
2011 |
2012 |
|
Sales Growth |
(TEC) |
25% |
25% |
||
|
Industry) |
10% |
12% |
|||
|
(PROFITABILITY) |
Profit margin |
(TEC) |
7.35% |
6.12% |
6.38% |
|
|
(Industry) |
7.71% |
7.82% |
7.96% |
|
|
(PROFITABILITY) |
Return on assets
|
(TEC) |
8.02% |
6.80% |
5.70% |
|
|
(Industry) |
7.94% |
8.68% |
8.95% |
|
|
(PROFITABILITY) |
Return on equity
|
(TEC) |
15.90% |
14.20% |
13.98% |
|
|
(Industry) |
14.31% |
15.26% |
16.01% |
|
|
(ACTIVITY) |
Receivable turnover |
(TEC) |
7.06x |
5.79x |
5.21x |
|
|
(Industry) |
9.02x |
8.86x |
9.31x |
|
|
(ACTIVITY) |
Average collection period |
(TEC) |
51.0 days |
62.2 days |
69.1 days |
|
|
(Industry) |
39.9 days |
40.6 days |
38.7 days |
|
|
(ACTIVITY) |
Inventory turnover |
(TEC) |
5.22x |
5.75x |
6.47x |
|
|
(Industry) |
4.24x |
5.10x |
5.11x |
|
|
(ACTIVITY) |
Fixed asset turnover |
(TEC) |
1.85x |
1.96x |
1.35x |
|
|
(Industry) |
1.60x |
1.64 |
1.75x |
|
|
(ACTIVITY) |
Total asset turnover |
(TEC) |
1.09x |
1.11x |
0.89x |
|
|
(Industry) |
1.05x |
1.10x |
1.12x |
|
|
(LIQUIDITY) |
Current ratio |
(TEC) |
2.04x |
1.72x |
1.31x |
|
|
(Industry) |
1.96x |
2.25x |
2.40x |
|
|
(LIQUIDITY) |
Quick ratio |
(TEC) |
1.00x |
.95x |
0.78x |
|
|
(Industry) |
1.37x |
1.41x |
1.38x |
|
|
(LEVERAGE) |
Debt to total assets |
(TEC) |
49.58% |
52.12% |
59.23% |
|
|
(Industry) |
43.47% |
43.11% |
44.10% |
|
|
(LEVERAGE) |
Times interest earned |
(TEC) |
4.57x |
4.13x |
3.06x |
|
|
(Industry) |
6.50x |
5.99x |
6.61x |
|
|
(LEVERAGE) |
Fixed charge coverage |
(TEC) |
3.50x |
3.35x |
2.75x |
|
|
(Industry) |
4.70x |
4.69x |
4.73x |
|
|
(MRKT-INVESTORS) |
Growth in E.P.S.
|
(TEC) |
—- |
4.1% |
2.9% |
|
(Industry) |
—- |
10.1% |
13.3% |
QUESTIONS
- Assess TEC’s financial position (strengths, weaknesses, risks, etc) based on its financial statements and ratio analysis presented in exhibits 1, 2 & 3; and suggest if and where corrective actions need to be taken. (Hint: Support your answer by citing specific ratio levels as compared to the industry and trends as well as the interrelations amongst the ratios)
- Do you believe that more financial ratio information is needed, in order to put forward an assessment? Name these ratios and justify your suggestion
- For each of the three entities described in the case study, identify one or two financial ratios- from those ratios presented in exhibit 3 – that you would rank to be top in the list of importance for evaluating Thunder Electronics’ performance over the three year period. (Justify your choices)
- Do the statements made from TEC’s CEO in the management meeting regarding the overall condition of the company appears to be telling you enough and being convincing? If not, what in your view is the major reason to challenge CEO’s statements?
- If you were the analyst of the Investment Trust, would you advice your clients to buy or not to buy a 15% stake in TEC? Justify your views (OPTIONAL)
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