Ratios

m.lopezz

third.pdf

Home >Business & Finance homework help >Accounting homework help >Ratios

Light Touch

LLiigghhtt TToouucchh The following case information includes:

• Part A  Company information

• Part B

 Balance sheets  Income statements

• Part C

 Industry data

• Part D

 Cash flow summary

Light Touch Part A

2 Credit Skills Assessment OLCB.LT.000.1212.CSAX.US.doc

CCoommppaannyy IInnffoorrmmaattiioonn Twenty-three years ago, chemical engineer Mike Cavallon developed a plastic material that behaved like leather but felt like peach fuzz. Recognizing that such a material could be valuable in cleaning applications, he continued his research until he could produce an effective, non-abrasive cleaner that was durable enough to meet industrial requirements. He organized a company and named it after his product, Light Touch, and for several years he manufactured cleaning cloths and sold them to a variety of businesses in his geographic area.

It then occurred to Mike that Light Touch would be an ideal product for drive-through car-wash operations. He designed “brushes” with many long strips of Light Touch, which, as he described them, “caressed the car instead of brushing it,” getting it clean without scratching. Car-wash owners were quick to recognize the benefits of Light Touch, and in a few years, nearly all of them were using it in their operations.

Light Touch’s sales are heaviest in the spring and summer months, and its seasonal low point occurs in January and February when freezing temperatures make washing cars much less practical.

Recently, Mike has successfully marketed Light Touch “brushes” to car washes over a much broader geographical market – including some with much warmer winters. Not surprisingly, this is evening out the seasonality of his sales.

Today is April 1, 20Y4. You have just been assigned the Light Touch account relationship for your bank.

Light Touch has been a bank customer since its inception. The bank has provided fixed-asset financing on numerous occasions – most recently in 20Y0, when the company refinanced $2 million of existing term debt and borrowed $2 million in new money for its expansion into car-wash brushes.

Your bank also made available to the company what has now grown to a $2 million line of credit facility. As a condition of extending this line, the bank has required that Light Touch be out of debt for 60 consecutive days during the first quarter of every year (the clean-up period). Until last year, the company was able to meet the clean-up requirement easily every year. At the end of January 20Y4, however, the company was unable to clean up the line. In fact, at the end of February, the outstanding balance was $602,000. The company was unable to reduce the line significantly below $600,000 at any time during the entire first quarter. Your predecessor on the account waived the clean-up requirement on the basis of his strong confidence in the company’s management and the company’s excellent conduct of its account with the bank over the years. The balance on the line of credit as of March 30 was $918,000.

The credit file contains notes made by the former account manager that describe management’s expectation of continuing growth, especially in the Car Wash division, on the order of 20 percent in 20Y4. Light Touch has requested a $1 million increase in the line of credit facility.

Light Touch Part B

20Y3 20Y2 20Y1 ASSETS Current assets Cash $ 0 $ 0 600$ Accounts receivable 2,454 2,158 1,440 Inventory 3,480 3,168 2,500 Prepaid expenses 416 240 302 Other current assets 224 180 400 Total current assets 6,574 5,746 5,242

Fixed assets 2,030 1,542 1,470

Other noncurrent assets 640 420 428

TOTAL ASSETS 9,244$ 7,708$ 7,140$

LIABILITIES AND EQUITY Current liabilities Short-term debt 604$ 20$ $ 0 Current portion—LTD 400 400 400 Accounts payable 1,672 1,426 890 Accrued expenses 412 384 340 Dividends payable 90 0 0 Taxes payable 216 138 128 Other current liabilities 60 32 152 Total current liabilities 3,454 2,400 1,910

Long-term debt 1,984 2,384 2,784

Deferred taxes 120 116 108

Stockholder's equity Paid-in capital 2,306 2,000 2,000 Retained earnings 1,380 808 338 Total stockholders' equity 3,686 2,808 2,338

TOTAL LIABILITIES AND EQUITY 9,244$ 7,708$ 7,140$

Working investment 3,850$ 3,516$ 2,710$

Light Touch Balance Sheets

(in $000s) As At December 31:

Light Touch Part B

20Y3 20Y2 20Y1

Sales 21,420$ 18,000$ 15,000$ Depreciation expense 206 162 150 Cash cost of goods sold 14,694 12,498 10,490 Gross profit 6,520 5,340 4,360

Operating expenses 3,988 3,218 2,454 Interest expense 260 252 286 Income before taxes 2,272 1,870 1,620

Taxes 1,128 892 648 Net income 1,144$ 978$ 972$

Dividends 572 508 388

Retained earnings 572$ 470$ 584$

Light Touch Income Statements

(in $000s) Years Ended December 31:

Light Touch Part C

20Y3 20Y2 20Y1 BALANCE SHEETS Current assets Cash and equivalents 5.5 % 4.9 % 4.2 % Accounts receivable 27.0 25.3 23.8 Inventory 39.8 40.7 42.7 Other current assets 1.7 1.6 1.5 Total current assets 74.0 72.5 72.2

Fixed assets (net) 19.5 20.8 21.1

Other noncurrent assets 6.5 6.7 6.7

TOTAL ASSETS 100.0 % 100.0 % 100.0 %

Current liabilities Short-term debt 14.1 14.0 14.1 Current maturities—LTD 3.0 3.1 3.3 Accounts payable 15.1 13.3 12.0 Accrued expenses 10.4 10.8 11.0 Total current liabilities 42.6 41.2 40.4

Long-term debt 15.4 16.7 17.5

Other noncurrent liabilities 2.3 2.1 2.0

Equity and reserves 39.7 40.0 40.1

TOTAL LIABILITIES AND EQUITY 100.0 % 100.0 % 100.0 %

20Y3 20Y2 20Y1 INCOME STATEMENTS Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold 67.8 69.1 70.1 Gross profit 32.2 30.9 29.9

Operating expenses 25.8 25.3 25.9 Operating profit 6.4 5.6 4.0

All other expenses 2.0 1.8 2.1 Income before taxes 4.4 % 3.8 % 1.9 %

RATIOS AND INDICATORS Current ratio (range) 1.3–2.7 1.4–2.6 1.3–2.6 Accounts receivable DOH (range) 36–72 34–68 35–74 Inventory DOH (range) 70–165 81–170 85–185 Sales/Total assets (range) 1.5–2.5 1.4–2.4 1.3–2.1

Cleaning Equipment Manufacturers Industry Data

Light Touch Part D

Cash Flow Summary (in $000s) Company Name: Light Touch

+ -

A (U) S

L/E S (U)

Target Line Number 20Y2 20Y3 Sales revenue (net) (1) 18,000 21,420

  Accounts receivable (2) (718) (296) Cash collected from sales (3) 17,282 21,124

Cash cost of goods sold (4) (12,498) (14,694)  Inventory (5) (668) (312)  Accounts payable (6) 536 246

 Cash paid for production (7) (12,630) (14,760) Cash from trading activities (3) + (7) = (8) 4,652 6,364

Cash SG&A expense (9) (3,218) (3,988)  Prepaid expenses (10) 62 (176)  Accrued expenses (11) 44 28

 Cash paid for operating costs (12) (3,112) (4,136) Cash after operations (8) + (12) = (13) 1,540 2,228

Other income (expense) (14) 0 0  Other current and noncurrent accounts (15) 108 (236) Income tax expense (16) (892) (1,128)  Deferred income taxes (17) 8 4  Income taxes payable (18) 10 78

 Taxes paid and other income (expense) (19) (766) (1,282) Net cash after operations (13) + (19) = (20) 774 946

Interest expense (21) (252) (260)  Interest payable (22) 0 0 Dividends declared or owners’ withdrawals (23) (508) (572)  Dividends payable (24) 0 90

 Cash paid for dividends and interest (25) (760) (742) Cash after financing costs (20) + (25) = (26) 14 204

 Current portion long-term debt (prior year) (27) (400) (400) Cash after debt amortization (26) + (27) = (28) (386) (196)

 Fixed assets (29) (234) (694)  Investments (30) 0 0  Intangibles (31) 0 0

 Cash paid for plant and investments (32) (234) (694) Financing surplus (requirement) (28) + (32) = (33) (620) (890)

 Short-term debt (notes payable) (34) 20 584  Long-term debt (35) 0 0  Preferred stock (36) 0 0  Common stock (37) 0 306 Total external financing (38) 20 890

 Financing surplus (requirement) + Total external financing (33) + (38) = (39) (600) 0 PROOF:  Cash and marketable securities (40) (600) 0