3.

What calculations should Juan do in order to get a good grasp of what is going on with
Quickfix’s performance?
Dupont analysis of return on equity, can be of a vital help to Juan. Especially since its primary
advantage includes allowing one to see the fuller picture of a company's overall financial health
and performance, as it provides more equity valuation tools. This may help
Juan determine what has affected the Quckfix’s profitability, considering this was the main
problem of the owner. Moreover, the help of financial ratios regarding the whole situation can
also not be underestimated. These can serve as essential sources of information about the
business’s overall health, which aids in company’s performance evaluation, uncovers signs of
trouble, and can be used to in comparison to other similar businesses in the industry. Main
financial ratios such as, liquidity, leverage, profitability, activity, and coverage ratios, can also be
calculated to help Juan get a clear sense of idea about how the business perform and what
situation it is in.

Liquidity Ratio 2000 2001 2002 2003 2004

Current Asset 6.38 3.68 3.56 3.62 3.79

Current ratio = =
Current Liabilities

Current Asset−Inventories 2.54 2.00 0.57 0.61 0.62

Quick ratio = =¿
Current Liabilities

The current ratio for 2004 shows 3.79, indicating a good sign as it’s higher than 1, signifying that its
current assets are more than its current liabilities. Thus, the company have the ability to pay short-term
obligations. On the other hand, its quick ratio is lower than 1, indicating that the business will be
inefficient at paying its short-term liabilities through assets that can be readily convertible into cash.
Liquidity Ratio 2000 2001 2002 2003 2004

EBIT
Operating Margin =
Sales
= 10.50% 11.30% 6.69% 2.28% 4.57%

Net Income 2.77% 3.49% 0.27% -1.88% -0.01%

Profit Margin =
Sales
=

Net Income 2.60% 2.89% 0.21% -1.68% -0.01%

Return on Total Assets = =¿
Total Assets

EBIT 9.84% 9.35% 5.24% 2.04% 4.78%

Basic Earning Power (BEP) = =¿
Total Asset
 Net Income 4.94% 6.36% 0.59% -4.76% -0.03%
Return on equity (ROE) = =
Equity

EBIT (1−T ) 6.05% 5.73% 3.23% 1.25% 2.95%

Return on Invested =
Total Invested Capital
=
Capital (ROIC)

Profitability ratios measure and evaluate the ability of a company to generate income (profit) relative to
revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time.
These can also be used by Juan know how well Quickfix utilizes its assets to produce profit and value to
shareholders. The higher the percentages in these ratios, the better, as it reflects efficiency of core
operations. The higher the ratios, indicates better chances of surviving an economic slowdown, and
increases the business’ ability to pay for fixed costs and interest on maturing obligations.

Asset Management/ Activity Ratios 2000 2001 2002 2003 2004

COGS
Inventory turnover =
Inventory
= 1.92 2.07 1.93 1.93 2.05

Receivables
DSO = = 6 7 9 32 32
Average sales per day

Sales
Fixed Asset Turnover = Asset ¿= 2.67 3.08 2.84 2.97 3.44
Net ¿
Sales
Total assets turnover =
Total Assets
= 0.94 0.92 0.96 1.03 1.16

Activity ratios represent how efficient are the company’s operations or how efficiently a company is in
employing its capital or assets. The turnover ratios are vital at showing how often certain assets move
within the operations, while the DSO, specifically focuses on the average number of days that it takes a
company to collect payment after a sale has been made. These ratios measure how a company handles
inventory management, track a company's fiscal progress over multiple recording periods, and may help
map out a forward-looking picture of a company's prospective performance.
 Debt Management/ Coverage Ratios 2000 2001 2002 2003 2004

Total debt
Leverage Ratio =
Total Equty
= 46% 54% 63% 64% 63%

EBIT
Times Interest Earned =
Interest charges
= 1.79 2.06 1.07 0.42 1.00

Quickfix incurred a lot of interest expenses, so coverage ratios may become handy as well. Times

interest earned ratio, can measure Quickfix’s ability to pay the interest on its outstanding debt. Just like

liquidity ratio, the higher the ratio, the better. However, it has to be greater than 1.5, and by assessing

the 2004’s result which is the current year, it shows that it is lower than of the previous year, indicating

that the company’s ability to pay its debts are becoming questionable.

Dupont Analysis   2000 2001 2002 2003 2004

Net profit Margin = Net Income 16,634 22,859 2,126 -16,435 -102

Revenue 600,000 655,000 780,000 873,600 1,013,376

Net profit Margin =   2.77% 3.49% 0.27% -1.88% -0.01%

Asset Turnover = Sales 600,000 655,000 780,000 873,600 1,013,376

  Average Total 640,000 715,550 809,016 850,882 874,406

Asset

Asset Turnover =   0.94 0.92 0.96 1.03 1.16

Equity Multiplier = Average Total 640,000 791,099 995,948 976,479 968,503

Assets =

  Average 336,634 348,064 352,582 350,733 349,602

Shareholders’
Equity

Equity Multiplier == 1.90 2.27 2.82 2.78 2.77

DuPont = NPM*Asset 4.94% 7.26% 0.74% -5.37% -0.03%

Turnover*EM
=
This is Quickfix’s Dupont computations. A DuPont analysis can be used by Juan to evaluate the

component parts of Quickfix’s return on equity (ROE). This will allow him to determine what financial

activities are contributing the most to the changes in ROE. Moreover, Juan can also use the result to

compare the operational efficiency of similar firms, and identify strengths or weaknesses that should be

addressed. It can also help him deduce most importantly, if it is the firm’s profitability or use of assets or

debt that’s driving ROE. In this case, leading Juan to know, from the computations above, that it is

profitability which affected more of the ROE than of assets and or debt.

6. Comment on Quickfix’s liquidity, asset utilization, long term solvency, and profitability
ratios. What arguments would have to be made to convince the bank that they should grant
Quickfix the loan?
In terms of Liquidity, Quickfix’s current ratio is obtained by dividing the current assets with the
current liabilities. Supporting the what’s indicated on question number 3, a ratio of 1 and higher
is an ideal liquidity ratio. If it tis is applied in assessing Quickfix’s overall liquidity, it can be said
that is quite good, having a current ratio of 3.79. It also indicates some improvements over the
past three years, however, if compared to the first year of operation, the current ratio of the firm
decreased, although it may be improved if solutions are quickly realized. On the other hand, the
quick ratio stand only at 0.62, indicating that the firm's ability to pay its short-term obligations
with cash can be questionable considering it has deteriorated quite significantly since 2002.
Moreover, by looking at the balance sheet of the business, the inventories can be seen taking a
large part of the firm’s current assets, which can be a determining factor of the Quickfix’s quick
ratio’s decline. Inventories can be quite expensive to maintain, in order to improve in quick ratio,
these unsold inventories needs to either be sold, or distributed. Quickfix may consider producing
or maintaining only enough inventory to meet immediate demands and to avoid stockouts.
The firm’s asset utilization shows decline in significant parts, although there can be
improvements seen in some. This fact can be illustrated by the significant fluctuations in fixed
asset turnover between 2001 and 2002, showing further improvements for the next years. This
means that the fixed assets are used intensively and efficiently in Quickfix’s operations. Further,
the total asset turnover has steadily improved, this may mean that the company is using its assets
efficiently in the past five years. On the flip side however, the average collection period,
unfortunately, shows a considerable decline from less than 10 days to 32 days, indicating that the
business may be having some difficulties in collecting receivables from its costumers. This can
be risky, because whenever Quickfix hold onto receivables for a long period, it may face an
opportunity cost, or lose investing opportunities. Therefore, Quickfix needs to reevaluate the
company’s credit policies to ensure timely receivable collections from its customers.
In terms of Quickfix’s Long Term Solvency. Quickfix’s debt to equity or leverage ratio shows a
steady increase. Quickfix’s leverage ratio increased from 46% in 2000, to 63% in 2004. This
does not indicate a good result, because a high D/E Ratio means high risk. It shows that the
company have been aggressive in financing its growth with debt as the business relies more on
external lenders. This may lead to a dangerous situation if continued, and may cause detriment to
Quickfix’s operations, since it will most likely affect its investors’ perspective and judgment of
the company. This also can result in volatile earnings because of the additional interest expense.
In addition, if the company's interest expense grows too high, it may increase the company's
chances of bankruptcy. Moreover, in the past 4 years, Quickfix has been financing through debt,
making its solvency not quite well. These ratios may indicate that a significant percentage of
assets financed by debts is increasing. Its interest coverage ratio as indicated on question no. 3,
has results 0.42 in 2003, and 1.00 in 2004. This measure heightens Quickfix’s questionable
capacity to pay off its debts. In order for the coverage ratio to reflect a positive effect, it needs to
have a ratio higher than 1.5, but since Quickfix’s ratios are low, it can be said that its long term
solvency is at a high risk and they have little, if no ability to pay their obligations
Profitability ratios is helpful in analysing business productivity, by comparing income to sales,
assets, and equity. It may also represent the combination of asset and debt management
categories, and its affects on the ROE of the firm. High profitability ratio reflects a higher
efficiency of core operations which is commonly sought-after by most companies. In application
to Quicksix’s ratios, the significant decline for the past three years implies that the business is
performing bad, which results negative percentages.
Juan may have to highlight on the arguments regarding plans on liquidity ratio and total asset
turnover. Policies that may help in collecting accounts receivable may be vital to improve cash
inflow from operations, which may help keep debts from accumulating. He may further state that
company’s fixed assets are used intensively and efficiently in Quickfix’s operations, which
would allow the firm to do the same on its current assets and inventories. Juan may introduce
the plan of cutting off unnecessary expenses, creating just enough inventory, and collecting
accounts receivable on time, which may result into a good liquidity ratio. This process will allow
Quickfix have the necessary cash to finance and fund its operations, and be sustainable enough to
pay off the liabilities without incurring additional expenses and debts. Furthermore, Juan may
tell the bank that the company can improve its total asset turnover by increasing sales, and
getting rid of assets that incurs more cost in maintenance, or will no longer be valuable for the
firm’s daily operations. Another good argument, is by presenting Quickfix proof of inventory
management system in order to ease the doubts of the bank about transparency, as well as
strengthen the possibility that the money lent to the company will be used for further growth.
Furthermore, Juan may tell the bank that the business will improve its cash coverage and interest
coverage ratios by paying off existing debt and decreasing operating expenses, which may result
to an increase on net income. In addition to this, the company will limit its inventory to an
enough quantity, so cash that will be supposedly used in creating them, would be used to other
investment and available opportunity instead. Juan may state plans to improve everything,
especially with it’s core operations to maximize value and profit. So after, they can operate more
efficiently and continue growing until they pay off their debt with the bank.
9. What kinds of problems do you think Juan would have to cope with when doing a
comprehensive financial statement analysis of Quickfix Auto Parts? What are the
limitations of financial statement analysis in general?
In order to present clearer, the kinds of problems Juan would have to cope with, when doing a
comprehensive financial statement analysis for Quickfix Auto Parts, the researchers have it
classified into two parts. First part would be the general problems and limitations, is naturally of
a wider scope compared to the second part, which are the specific problems, that mostly occur
inside the firm’s operations and Juan may have a control over.
Under the general classification, 3 problems and 2 limitations may arise. First, the selection of a
comparison benchmark. Because the industry that Quickfix operates in, has a lot of competitors,
this may result to certain confusion about what appropriate benchmark should he use for the
business. In addition, Quickfix financial statements showed that it had outstanding shares and no
dividends paid, which means that the probability that they have no sale of stocks compared to
other companies may be huge. This can be a problem to Juan as it is further supported by
Quickfix negative balance in the net income for the past 2 years. The company is losing more
than gaining, it is spending much more than it’s earning, and it has debts as the primary source of
fund. And the possibility that it might be one of the companies that perform unwell compared to
other companies of the same industry, can be a reality more than a probability. If the company is
trailing behind its competitors, this may make it harder for Juan to compare relevant data and
gain appropriate analysis, to the company he is comparing to.
The second problem is the the fact that Quickfix operates in an industry that requires complling
transaction and selling skills. Since they are an Autoparts firm, their products are only sought by
customers when needed, such as in times of needing a new car part, repair, or maintenance. In a
sense, that it is a seasonal business. Due to this fact, Juan needs to know when the business
usually generate low sales revenue so that he could address this problem, and do appropriate
actions to improve performance and financial health during these times.
Similarly, the last problem is the fact that Quickfix’s net loss is rather significant enough to
affect various of accounts in the financial statements. Considering that income is vital in the
business operations, Juan must identify what are the major factors that resulted to this negative.
He needs to figure out and analyse thoroughly, all the possible reason behind this, whether the
business is spending too much to acquire its products, or the business is spending too much to
run its operations -or both.
Juan has to also remind himself that the limitations the financial statements may have is due to
the fact that every business have different accounting policies, which may or may not allow it to
further assess their financial performance through different evaluating tools. These differences
would result different amount realization and derivation from other companies despite the similar
industry they are in. This can hinder Juan to freely and easily compare or analyze data on one to
more firms. Different usage of fiscal years and reporting period from different companies can
also make it quite hard for Juan to find similarities in market trends, since some may report
earlier or later than Juan needs information. This may reduce the timeliness and relevance of
information. And since the fiscal years are decided by each company, it may mean it is
something that Juan has no control over, leading him to do extra research in order to gather and
collect appropriate data to produce accurate analysis. These limitations may make it difficult for
the firm to determine its position within the industry, and might even result confusion if wrong
industry averages was used.
Under our specific classification, we have identified 1 problem. The business may have to revise
certain accounting policies regarding asset and expense management. Since the company is
incurring losses, Juan may have to conduct a thorough investigation within the company. It may
have to consider the entirety of the Quickfix as a whole. Gathering appropriate data may take
time and can be costly, since it requires coordination among and within the members of the
firms.