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Case Study - Corp Finance - Padgett Paper Products
Case Study - Corp Finance - Padgett Paper Products
Products Company
8,000
7,000 7,221
thousand of USD
6,000
5,000
4,000
3,000 3,118
2,000
1,000
338 221 507 455
0 0 0
1993 1994 1995 1996
Years
There is a huge increase in short term notes, reaching 130% increase from 1995 to 1996.
There are minimal fluctuations in long term debt as compared to short term debt.
Continued…
Figures from Padgett’s Income Statements for the Fiscal Years Ended April
30,1993-1996 ( thousand of dollars except per share figures )
1993 1994 1995 1996
Gross Sales 10,603 10,632 14,293 16,014
Operating Expenses 5,814 6,965 9,742 10,968
Operating Profit 4,789 3,667 4,551 5,046
Interest Expense 0 32 220 379
Other expenses ( income ) 83 -42 -39 -71
Income taxes 2,702 1,893 2,216 2,132
Profit after taxes 2,004 1,784 2,154 2,606
Number of shares ( 000 ) 1,000 1,115 1,116 1,118
Earnings per share 2.00 1.60 1.93 2.33
Dividends per share 1.00 1.00 1.00 1.00
Incr (Dcr) Incr (Dcr) Incr (Dcr) %Diff %Diff %Diff
1993-1994 1994-1995 1995-1996 1993-1994 1994-1995 1995-1996
Gross Sales 29 3,661 1,721 0.27% 34.43% 12.04%
Operating Expenses 1,151 2,777 1,226 19.80% 39.87% 12.58%
Operating Profit -1,122 884 495 -23.43% 24.11% 10.88%
Interest Expense 32 188 159 587.50% 72.27%
Other expenses ( income ) -125 3 -32 -150.60% -7.14% 82.05%
Income taxes -809 323 -84 -29.94% 17.06% -3.79%
Profit after taxes -220 370 452 -10.98% 20.74% 20.98%
Analysis of Current Financial Status
Diff Diff Diff
1993- 1994- 1995-
Profitability 1993 1994 1995 1996 1994 1995 1996
Sales Growth n.a. 3.37% 35.56% 11.95% 32.18% -23.60%
Gross Profit Margin 40.27% 39.06% 38.74% 38.77% -1.21% -0.32% 0.03%
Operating expenses/sales 22.08% 25.59% 26.40% 26.55% 3.51% 0.81% 0.15%
Pre-tax margin 17.87% 13.51% 11.84% 11.47% -4.36% -1.67% -0.37%
After-tax margin 7.61% 6.55% 5.84% 6.31% -1.06% -0.72% 0.47%
ROE n.a. 11.36% 13.01% 14.63% 1.65% 1.61%
ROA 10.67% 9.23% 8.66% 8.41% -1.44% -0.56% -0.26%
EBIT/total assets 25.05% 19.18% 18.46% 16.51% -5.86% -0.72% -1.95%
Dividend Payout 49.90% 62.50% 51.81% 42.90% 12.60% -10.69% -8.91%
Self sustaining Growth rate n.a. 4.26% 6.27% 8.35%
18,000
16,000 16,014
14,000 14,293
thousand of USD
12,000
10,603 10,632 10,968
10,000 9,742
8,000
6,965
6,000 5,814
4,000
2,000 2,004 2,154 2,606
1,784
0 83
1.00 1.00
-42 1.00
-39 1.00
-71
-2,000
1993 1994 1995 1996
Years
Gross Sales Profit after taxes
Operating Expenses Other expenses ( income )
Dividends per share
Despite rise and fall in sales, OPEX, NI, and other figures in the its
Income Statement, Padgett’s Div per Share remains constant.
Analysis of Current Financial Status
360/Turnover on Sales (1993-1996)
250
200
Number of Days
150
100
50
-
Receivab les Invento ry Acco unt s Wo rking Fixed As s et Net wo rth
Payab le Cap it al
Metrics
0.80
0.67
0.60
0.46
0.40
0.20 0.22 0.21
0.00 0.02 0.01 0.03 0.02
1993 1994 1995 1996
Years
has
high
of Tri-state additional 3.6m loan
Equity Ratio 2.2% 1.4% 3.0% 2.5% total long term debt 6.1x of short term notes in 1995 and 15.9x in 1996
Interest coverage
(EBIT/interest ) n.a. 115.9 20.9 13.5
Liquidity
Quick Ratio ((cash +
securities
+AR )/current
liabilities) 2.7 2.4 1.1 0.8
Current ratio
( current assets /
current liabilities ) 5.8 5.8 2.8 2.1
Analysis of Current Financial Status
Key Findings:
There is a huge amount of short-term
notes vis-à-vis long–term debt: a very
risky position
Owners continue to get constant
dividends regardless of the firms financial
status
Plowback rate is very low
Current liabilities could not anymore be
financed by current assets
Debt/Equity Ratio reveals that current
situation may lead to bankruptcy in the
long run
General Recommendation
Shift to long-term financing to finance long-
term assets
First level of leverage
• Collateralized assets (c/o Rachelle)
• Mortgage general purpose building (c/o Rachelle)
• Continue using LIFO instead of FIFO (c/o Erle)
Second level of leverage
• Debt through insurance company (c/o Mic)
• Factor Receivables at 2% instead of 2/10 net 30 (c/o
Rachelle)
LIFO Instead of FIFO