Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

GSMB 7307
Strategic Finance

CASE STUDY 2

Gillian Pool & Spa Supplies

For: Associate Professor Dr. Zulkufly Ramly

By: Tengku Hazira binti Tengku Mohd Khalid

Matric No: G2314720

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

1. Question 1

1.1 Calculate Gillian Pool & Spa Supplies average annual compound growth rate of

sales

The Calculation

Beginning Value (BV) = $900,000

Ending Value (EV) = $1,520,064

Number of Years (N) = 5

Average Annual Compound Growth Rate (%) = [(1,520,064 / 900,000) ^ (1 / 5) - 1] * 100

Using the Compound Annual Growth Rate (CAGR) as above, indicates that the company has

grown at an average annual rate of approximately 10.94% over 5 years, a favourable sign of a

healthy and expanding business

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

1.2 Analyse its earnings performance for the past five years

1. Revenue is growing for the period of 5 years

2. However net income is having a declining trend could be due to few factors that

has been identified;

o Rising costs: operating expenses increased faster at approx 92% and COGS at

79% comparing to the increase in revenue at 69%

o Miscellaneous expenses: unusual one-time expenses at 750% on year 5

comparing to year 1 that may have affected profitability.

o Debt and interest expenses: short term debt has increase 271% and interest

payments has increase to 78.5% on the year 5 and year 1, giving a direct

impact on the declining trend on net income

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

2. Question 2

In order to shed some light on the firm’s financial condition, which statement should Denny

analyse, and which measure/calculations should he use to compile a detailed report? Please

explain why?

The income statement provides a comprehensive view of a company's revenues, expenses,

and profitability over a specific period

 Revenue on the inclining trend which shows the company is growing over the period

of 5 years

 GP Margin : A declining trend in the gross profit margin indicates decline on

effectiveness of the cost management

 Net Profit Margin is reducing significantly to 0% at the end of year 5 showing a

weaker profitability performance

 EPS is significantly declining and at (RM0.01) on the year 5, giving a negative

insight to the shareholder where they will have a loss of 1 cent for each $1 that on the

money invested to the company

 Increase in the total interest expenses which brought the company income to decline

over the period of 5 years

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

3. Question 3

Realising that comparison with an appropriate benchmark is key component of

comprehensive ratio analysis, how should Denny go about finding a suitable benchmark

 Identify Comparable Companies - These could be competitors in the same industry

or sector, or companies with similar business models, size, and market characteristic

 Select an Industry or Sector Benchmark - These benchmarks are often readily

available and provide context for how a company is performing relative to its peers in

the same industry

 Peer Group Analysis - Analyse the financial ratios of these peers to create a

customised benchmark specific to the company's competitive landscape

This comparative analysis will provide valuable insights into how the company measures up

in terms of liquidity, profitability, solvency, and other key financial metric

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

4. Question 4

While attending his MBA finance class, Denny had learned that doing a common size

analysis and a DuPont analysis are very useful first steps when analysing a company’s health.

Using the five-year financial statements, help Denny perform such analyses. Comment on the

findings

4.1 Common Size Analysis : From the composition of the income statement and balance

sheet over the five-year period. It revealed declining trends of increasing operating

expenses and in the total equity while having a declining gross profit margins

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

4.2 DuPont Analysis : A declining in the company’s ROE could be due to significantly

declining net profit margins, increase in both of its asset turnover and financial

leverage

5. Question 5

Analyse Gillian Pool’s liquidity, asset utilization, long term solvency and profitability

ratios. What arguments would have to be made to convince the bank that it should

grant Gillian Pool & Spa supplies the loan?

5.1 Liquidity : Current ratio & Quick Ratio - The company have a declining trend of

current ratio however the number suggested that the company still able and have

ample current asset to cover its short term obligation

5.2 Asset Utilisation Ratio : The company have a significant higher in the Asset

Turnover Ratio for which indicates they are more efficient in asset utilisation.

However, it has an upward trend in the Debt to Equity Ratio where it give an adverse

effect because its indicating the company is having a higher financial risk

5.3 Profitability Ratio : The company overall profitability ratio is observed of having a

downward trend which indicates a weaker performance in the profitability

In summary, positive liquidity ratio indicating a balanced mix of debt and equity

financing and lower financial risk while efficient asset utilisation where it shows it is

effectively utilise its asset to generate income: efficient operation

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

6. Question 6

If you were the commercial loan officer And approached for a short term loan of $50,000,

what would your decision be? Why?

YES

6.1 Negative net income - raises concern on the ability to generate sufficient cash flow to

repay the loan

6.2 Repayment Capacity - A negative net income suggests that the company may face

challenges in servicing debt

6.3 Purpose of the Loan - The purpose of the loan should align with the company's

business needs which is to cover his expanding business is considered as temporary

cash flow gap

Request additional financial information and business plans to better understand the

company's strategy for improving profitability and repaying the loan probably the Cash Flow

Statement would help in understanding the situation better

7. Question 7

What recommendations should Denny make to Andy for improvement, if any?

1. To review and restructure the COGS as it has consistently increasing and of end up at

79% in total in the year 5 compared to year 1

2. To not ignore Balance-Sheet Items where we can actually see the increasing trend in

both short term and long term debt of which need to be restructure.

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

8. Question 8

What kinds of problems do you think Denny would have to cope with when conducting a

comprehensive financial statement analysis of Gillian Pool & Spa Supplies, what are the

limitations of financial statement analysis in general?

 Non-Financial Factors - when Andy decided to move to a larger facility that would

incur the cost of borrowings - long term and mortgage and that will incur interest

expense as well

 Lack of Context - To fully understand the numbers, one needs to consider the

broader context, including industry benchmarks, economic conditions, and the

company's strategic goal

 Ratios Alone Are Not Definitive - While financial ratios are useful for analysis, they

are only part of the overall picture

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 Case Study 2: Gillian Pool & Spa Supplies | T Hazira T Mohd Khalid

References

1. Berk, J., DeMarzo, P. and Hartford, J. (2021). Fundamentals of Corporate

Finance. (5th. Ed.) Pearson

2. OpenAI. (2023). ChatGPT (Mar 14 version) [Large language model].

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