5014_ASS 1 # DRAFT 2* # ASSESSMENT 1 # Applied Managerial Finance # MBA # FLEXPAH CAPELLA

Running head: Financial Conditions Analysis Toolscorp 1

Financial Conditions Analysis Toolscorp 14

Financial Conditions Analysis Toolscorp

hi

Dr. Henry Weber

Capella University

08/17/2020

Financial Conditions Analysis Toolscorp

Executive summary

This paper intends to provide a set of financial reports, including Income Statement, Balance Sheet, and Cash Flow Statement of Hostess bands. An assumption about the dollar values to be budgeted is examined. The explanation of three classifications of ratios will include liquidity, solvency, and profitability. A display of calculations and statements will reflect a comprehensive understanding of the financial ratios of Toolscorp Company.

Company Background

Toolscorp is known for its leading production of lawn furniture, lawnmowers, microwaves, power tools, and ranges in the soils of the U.S. The company has been in operation for decades now, this has enabled the company to make massive sales across Canada and the U.S., The company, is well-known for its strong reputation in the production of power tools. Toolscorp has a reliable supply chain network that operates both in the local and international markets. Their large manufacturer based in the U.S. has enabled the company to expand its market across the globe. On the other hand, the policies adopted by the company has helped it to be in operation for long and gain more on its products.

Toolscorp has about 80% of its stores in the U.S. which makes it to strongly depend on the U.S. market for all its revenue. This is approximately 75% of the income generated. Toolscorp does not leverage its online channel and social media to promote the company in order to attract new customers. This is quite significant to the growth of the company. However, the company has not invested mainly in the international market. The company has no discount or reward program to get the attention of the (Kingsnorth, 2019).

The demand for power tools is said to increase at a rate of 5% in the next 5 years. This increasingly high demand will continuously improve the company values and market share (Olson, et al 2018). Nevertheless, the company can diversify into a new market and reduce its dependence in the U.S market. This will benefit the company in terms of revenue stream and reduce the company's risk of sales and profits. However, if the company can invest in its online share, it can generate more profits and market share (Chaffey, & Ellis-Chadwick, 2019).

As the company looks to expand globally, they are faced with some challenges such as shortage of skilled workers, government regulations, and language barriers in a particular global market that can threaten the steady growth of profits for ToolsCorp. The cost of labor in the U.S. and Canada is increasing and, therefore, will reduce the profit margin of Toolscorp. Nonetheless, the company faces competition from various companies entering the power tools business. This has an intern led to fewer profit margins.

Financial analysis

As I review the business growth, I keep in mind the organization's ability to generate profits, as opposed to the past revenue to see if long-term obligations can be met. Understanding the percentage of the increase reflects profitability enough to retain financing. Toolscorp positive numbers and consistent improvements in profits secure the company's ability to generate positive market expectations and financial stability.

The actions of productivity are profit margin, profit on an asset, and appearance on equity. In the figure above, there are calculations of current ratio, profit margin, and after-tax ROE for Toolscorp. Profit margin refers to the proportion of the total revenue that an organization has earned out of total income received. It is the most essential concept as each organization; apart from non-profits, the primary objective is to make a profit. Profit margin is computed to know the percent of each dollar value of sales from the net income. A higher profit margin gives a higher return to stockholders. The profit margin is designed by separating Sales by Net Income. ROE is obtained by dividing Net Income by total Stockholders' Equity. (Gibbons, Hisrich, and DeSilva, 2015).

(Toolscorp Annual Report)

"Balance Sheet

All numbers in thousands

Period Ending	12/31/2017	12/31/2016	12/31/2015	12/31/2014
Current Assets
Cash and Cash Equivalents	135,701	26,855	64,473	-
Short Term Investments	-	-	-	-
Net Receivables	101,012	89,237	68,518	-
Inventory	34,345	30,444	25,130	-
Other Current Assets	-	-	4,655	-
Total Current Assets	279,028	151,363	168,817	-
Long Term Investments	2,900	-	-	-
Property Plant and Equipment	174,121	153,224	128,078	-
Goodwill	579,446	588,460	56,992	-
Intangible Assets	1,930,388	1,954,343	270,079	-
Accumulated Amortization	-	-	-	-
Other Assets	392	502	19,563	-
Deferred Long Term Asset Charges	-	-	-	-
Total Assets	2,966,275	2,847,892	643,529	-
Current Liabilities
Accounts Payable	49,992	34,083	28,053	-
Short/Current Long-Term Debt	11,268	11,496	9,250	-
Other Current Liabilities	54,810	37,793	36,197	-
Total Current Liabilities	127,851	103,926	92,758	-
Long Term Debt	987,920	993,374	1,193,667	-
Other Liabilities	377,931	519,181	17,225	-
Deferred Long Term Liability Charges	-	-	1,696	-
Minority Interest	342,240	334,192	-37,991	-
Negative Goodwill	-	-	-	-
Total Liabilities	1,493,702	1,616,481	1,303,650	-
Stockholders' Equity
Misc. Stocks Options Warrants	-	-	-	-
Redeemable Preferred Stock	-	-	-	-
Preferred Stock	-	-	-	-
Common Stock	13	13	-622,130	-
Retained Earnings	208,279	-15,618	-	-
Treasury Stock	1,318	-	-	-
Capital Surplus	920,723	912,824	-	-
Other Stockholder Equity	1,318	-	-	-
Total Stockholder Equity	1,130,333	897,219	-622,130	-
Net Tangible Assets	-1,379,501	-1,645,584	-949,201

Figure 1.3

Income Statement

All numbers in thousands

Revenue	12/31/2017	12/31/2016	12/31/2015	12/31/2014
Total Revenue	776,188	727,586	620,815	554,695
Cost of Revenue	449,290	413,429	358,612	320,763
Gross Profit	326,898	314,157	262,203	233,932
Operating Expenses
Research Development	-	-	-	-
Selling General and Administrative	116,033	114,850	94,256	90,983
Non-Recurring	-	-	-	-
Others	381	3,591	4,306	4,468
Total Operating Expenses	589,559	536,977	458,025	416,837
Operating Income or Loss	186,629	190,609	162,790	137,858
Revenue/Income from Continuing Operations
Total Other Income/Expenses Net	4,275	-145,992	-74,030	-56,394
Earnings Before Interest and Taxes	186,629	190,609	162,790	137,858
Interest Expense	-39,174	-67,033	-50,011	-37,447
Income Before Tax	190,904	44,617	88,760	81,464
Income Tax Expense	-67,204	-7,323	-	-
Minority Interest	342,240	334,192	-37,991	-37,991
Net Revenue/Income from Continuing Ops	258,108	51,940	88,760	81,464
Non-recurringgEvents
Discontinued Operations	-	-	-	-
Extraordinary Items	-	-	-	-
Effect of Accounting Changes	-	-	-	-
Other Items	-	-	-	-
Net Income
Net Income	223,897	52,807	84,253	77,197
Preferred Stock And Other Adjustments	-	-	-	-
Net Income Applicable to Common Shares	223,897	-4,404	84,253	77,197
"(YahooFinance.com)

The success of a business is measured using a profit and loss statement for that financial period. The better the profit and loss statement appear, it means there is more money coming in the business, the more appealing the business is to investors. This will show how the business is doing to directors, and it allows them to evaluate their own performance for the year and decide what they can do to improve company performance next year.

Financial ratio analysis

Liquidity

Quick and easy availability of cash is necessary for any business in order to pay off its obligations on time. These obligations can be any expense to keep the business running, such as financial debt, employee's salaries, suppliers, marketing expenses, etc. The business's ability to settle its debt can also be measured by its liquidity ratios – expressed by the relation between its assets and liabilities. The higher the rate, the higher the ability of a company to be solvent, and therefore financially stable. 

ToolsCorp has seen the relationship between its assets and liabilities deteriorate over the years since 2016. Its current ratio went from roughly 4.0 in 2016 to 2.18 in 2018. It means that for every dollar in debt/liability, ToolsCorp had $5 in cash (or other goods easily convertible to cash) to honor these obligations in 2016. This capacity was reduced by almost 37% in 2018, representing an increase in its liabilities not followed by the company's assets growth.

A higher indebtedness rate can be understood as a risk to creditors, as the risk of insolvency increases when a business has limited (or none) availability to cash to pay its debts and fulfill its obligations. That seems to be the case of ToolsCorp, especially when it comes to its cash ratio – the relationship between its more liquid current assets (such as cash and temporary investments) and its current liabilities – calculated as 0.09 in 2018, deeply below industry benchmarks settled in 0.5.

Asset-management ratios

ToolsCorp was able to bring their average collection period down from seventy-three days in 2016 to seventy days in 2017, and they kept it consistent through to 2018. It isn't a massive decrease, but it's an improvement, nonetheless. If they were able to bring it down to sixty days, like the rest of the industry, they would reduce their accounts receivable to $308.00. 

By adopting the Just-In-Time inventory, practice ToolsCorp was able to reduce their inventory levels, which sped up their cash conversion cycle. In 2016 their cash conversion cycle was 168 days, and by 2017 they were able to bring it down to 143 days. Their work-in-process and finished goods inventory turnover days improved, going from 7 days for work-in-process, to 3 days by 2018, and finished goods turnover went from 71 days in 2016 to 44 days by 2018. It appears that they were able to turn over inventory faster than the industry, meaning the company is spending less on holding costs. If the company can continue to keep its inventory turnover days under the industry ratios, it can start to generate more money by having more output per day. 

ToolsCorp took a hit on their fixed asset turnover ratio, bringing them below the industry when they invested in their new automatic feeders, packaging equipment, computers, and computer software plus the construction of their new warehouse. Their fixed asset turnover went from 4.61 in 2016 down to 2.82 in 2018, which is understandable because they invested highly in their company to try to compete with the rest of the industry and reduce labor costs. 

ToolsCorp was below the industry for total assets in 2016 with a ratio of 1.41 then down to 1.32 in 2018, meaning that the company produces $1.32 of revenue for every dollar that's invested in total assets. 

Profitability

The profitability ratios deal with a business's ability to generate profit. These ratios are critical to look at a business's financial position. ToolsCorp's calculation of its profitability ratios is very comparable to the industry except for 2018. For example, the return on equity for 2018 was 0.1%; this means that for every dollar invested, only 0.1 cents is earned by the shareholders. This is compared to their return on equity in 2016 at 21.76% and 2017 at 13.79%. ToolsCorp will have a hard time finding investors in the future. 

Net profit margin is one of the most critical factors in calculating a company's financial health. In 2016, ToolsCorp was right below the industry average at 8.99%, but by 2018 had dropped to 0.04%. This means that the company is not controlling their overhead or operating costs. 

The return on assets ratio is also a good indicator of a company's profitability. This ratio shows how much a company's assets generate a profit. In 2016, ToolsCorp had a return on assets of 12.70%; in 2017, it was 8.01%, and in 2018 was 0.06%. Every year ToolsCorp was well below the industry average of 17%. 

Trend analysis

Using the profitability ratios, we can see that ToolsCorp profitability is declining rapidly. Specifically, their net profit margin dropped 8.95% over two years, showing a considerable loss in profit and performance. Based on the industry averages, ToolsCorp should be more profitable than it currently is and needs to review its current costs and sales.

Based on these calculations, it is safe to say that Toolscorp has seen its capacity to pay off its debt/obligations deteriorate over the years, mostly because of an increase in its expenses, perhaps due to the acquisition of capital goods (land, plant, and equipment) from 2016 to 2018, and its consequent maintenance expenses, clearly not followed by an increase in its revenues. However, ToolsCorp numbers are slightly below the ones observed in the industry that alone does not necessarily mean that the company will be insolvent or cannot be profitable and successful.

Based on the analysis, the trend analysis will allow Maria to foresee her business monthly turnovers and expenses. This could be important for her business when applying for things like loans and help from Toolscorp and other investors. What she also has to consider is whether some months may be full of activity than others in order to make more money.

Industry Average Analysis

Debt coverage deals with a business's ability to pay its finance costs and principals each month. The more debt a business has, the more highly leveraged it is. The long-term debt to total capitalization ratio can help a business understand their debt coverage. ToolsCorp was 32% in 2016, 33% in 2017 and 38% in 2018. When a business has a high ratio compared to the industry, this explains that the business uses debt as its main source of financing. The industry ratio is 35%; ToolsCorp is in comparison to the industry and therefore uses an acceptable amount of debt as financing. 

When looking at ToolsCorp financial position as a whole, it is essential to look at debt. If the company is ever seeking to expand or buy new equipment, creditors will look for how much a business uses debt. If a business's liability is too high, then the creditors are taking on higher risk in the investment. ToolsCorp is currently sitting close to the industry standard in terms of debt and, therefore, wouldn't be too high of a risk for creditors. If they were looking to borrow a large sum, then they may want to raise more equity capital first to make sure they weren't using debt as a primary source of financing. 

Conclusion

An assumption about the dollar values was examined. An explanation of three classifications of ratios included liquidity, solvency, and profitability of ToolsCorp publicly-traded company data was used to compare the ratios in the annual financial report. The conclusion is that ToolsCorp continues to show growth and strong cash flow for future ventures to increase future revenues. ToolsCorp positive numbers and consistent increases in profits secure the company's ability to generate positive market expectations and financial stability. It is important to note, however, that ToolsCorp liabilities are significantly low. Overall the company is financially sound.

Recommendation

It has been only a few years since the company made these investments, so if they continue to turn over their inventories at the same rate, or a faster rate than the rest of the competition, they may be able to keep their 60% of the market share or possibly take more of the stock back. In 2017 and 2018, and they were able to get cash flowing throughout the company faster due to the inventory turnover. They should also be able to bring their labor costs down, but until they start to raise more capital. Therefore, I recommend Maria to use ToolsCorp as a buyer. The company will be of great benefit to Maria's company as ToolsCorp will be able to finance her business.

I expect Maria's business to be performing well, and I feel that this is convincing based on the market research that I have done for the industry. This is likely to happen if not exceed my prediction. What this will mean for her business is that in the first year of trading, it will make a steady profit in order to be able to call it a success. In the second year of trading, I have predicted a rise in prices for the business stock and overheads; however, because I have removed the high start-up costs which are associated with starting a business, it will allow her business to make a very healthy profit.

Reference

Chaffey, D., & Ellis-Chadwick, F. (2019). Digital marketing. Pearson UK.

Kingsnorth, S. (2019). Digital marketing strategy: an integrated approach to online marketing. Kogan page publishers.

Olson, E.M., Slater, S, F., Hult, G. T. M., & Olison, K. M (2018). The application of human resource management policies within the marketing organization: The impact on business and marketing strategy implementation. Industrial Marketing Management, 69, 62-73.