Question

What financial analyses need to be made and how using data from the financial statements (Attachment 1)? Use specific ratios or other measures to assess the financial strengths and weaknesses of your company using appropriate baseline comparisons. Provide this in table form. Provide the formula for each item used. Address any other issues in the case that might affect the current financial position. Be sure to address Liquidity, Safety (e. g., leverage), Profitability, and Efficiency ratios. What is your overall financial position and how should it be handled? If needed, what is an appropriate way to finance your strategy and what funding constraints might affect your strategy? Explain. Describe the specific financial linkages and effects on marketing, logistics, and strategic initiatives.

ATTACHMENT 1 - HARRISON COMPANY CASE FINANCIAL AND COMPETITOR INDUSTRY INFORMATION INCOME STATEMENTS Harrison Percent of Sales Harrison Percent of Sales Harrison Percent of Sales Industry Average Harrison Last Year $Million 48.127 38.453 9.674 7.893 100.0% 79.9% 20.1% 16.4% Harrison 2 Years Ago $Million 48.992 39.292 9.700 8.132 100.0% 80.2% 19.8% 16.6% Harrison 3 years Ago $Million 52.102 41.786 10.316 7.659 100.0% 80.2% 19.8% 14.7% Global Global Market Market Leader Leader $Million 348,650 100.0% 265,152 76.1% 83,498 23.9% XXXXXXXXXXXXX $25.00 80.0% 20.0% 1.059 .193 2.2% 0.4% .686 245 1.4% 0.5% .625 313 1.2% 0.6% XXXXXXXXXXXXX XXXXXXX Revenue Cost of Goods Sold Gross Profit Operating Expense General & Administrative Marketing Operating, Gen., Sell, & Admin Interest Expense COGS and Total Expenses Net Income Before Taxes Taxes Net Income After Taxes XXXXXXX XXXXXXXXXXXXX 193 XXXXXX 0.6% 64,320 1,529 18.4% 0.4% 0.8% 385 15.0% 1.6% 0.4% 312 47.983 99.7% 48.548 99.1% 50.695 97.3% 331,001 94.9% 96.6% .144 .048 0.3% 0.1% 0.9% 0.3% .147 1.407 469 2.7% 0.9% 17,649 6,365 5.1% 1.8% 3.4% 0.9% .096 0.2% 297 0.6% 936 1.8% 11,284 3.3% 2.5% $Million .288 .548 7.694 % Total Assets 1.0% 1.9% 26.7% $Million -440 .469 8.155 % Total Assets 1.5% 1.6% 27.8% $Million 2.421 .429 8.582 % Total Assets 7.9% 1.4% 28.0% $Million 8,373 3,840 34,375 % Total Assets 5.5% 2.5% 22.8% 1.7% 2.2% 24.6% BALANCE SHEETS Cash & Equivalents Receivables Inventory Total Current Assets Land, Stores Equipment Distribution Centers, & Trucks 8.530 29.6% 9.064 30.9% 11.432 37.3% 46,588 30.8% 28.5% 20.289 70.4% 20.268 69.1% 19.216 62.7% 104,605 69.2% 71.5% Total Assets 28.819 100.0% 29.332 100.0% 30.648 100.0% 151,193 100.0% $13.457

Answer 1

	Profitability Ratios	Harrison Company			Global Market Leader	Industry average
	Formula	3 years ago	2 years ago	Last year
Revenues		52.102	48.992	48.127	348650	25
Gross Profit		10.316	9.70	9.674	83498
Gross Profit Margin	Gross Profit / Revenue	19.80%	19.80%	20.10%	23.95%	20.00%
EBITDA	Gross Profit - Operating Expense - General & Administrative Expense - Marketing expense	1.719	0.637	0.529	19178
EBITDA Margin	EBITDA / Revenue	3.30%	1.30%	1.10%	5.50%	5.00%
Net Income after taxes	EBITDA - Interest - Taxes	0.936	0.297	0.096	11284
Net profit margin	Net income after taxes / revenue	1.80%	0.61%	2.33%	3.24%	2.50%
	Safety (i.e. Leverage) Ratios	Harrison Company			Global Market Leader	Industry average
	Formula	3 years ago	2 years ago	Last year
Equity	Stockholder's Equity	16.917	11.853	11.556	61573	5.18
Total Debt	Long Term Debt	3.900	2.407	4.813	37886	5.29
Total Outside Liabilities	Total Assets - stockholder's equity	13.731	17.479	17.263	89620	8.28
Debt Equity Ratio	Total Debt / Equity	0.23	0.20	0.42	0.62	1.02
Overall Gearing	Total Outside Liabilities / Equity	0.81	1.47	1.49	1.46	1.60
	Liquidity Ratios	Harrison Company			Global Market Leader	Industry average
	Formula	3 years ago	2 years ago	Last year
Current Assets	Total current assets	11.432	9.064	8.530	46588	3.84
Inventory	Inventory	8.582	8.155	7.694	34375	3.31
Current Liabilities	Total Current Liabilities	9.831	15.072	12.450	51734	2.99
Current Ratio	Curret Assets / Current Liabilities	1.16	0.60	0.69	0.90	1.28
Quick Ratio	(Current Assets - Inventory)/Current Liabilities	0.29	0.06	0.07	0.24	0.18
	Efficiency Ratios	Harrison Company			Global Market Leader	Industry average
	Formula	3 years ago	2 years ago	Last year
Revenue	Revenue	52.102	48.992	48.127	348650	25.00
Total Assets	Total Assets	30.648	29.332	28.819	151193	13.46
Equity	Total Stockholder's Equity	16.917	11.853	11.556	61573	5.18
Asset Turnover Ratio	Revenue / Total Assets	1.70	1.67	1.67	2.31	1.86
Equity Turnover Ratio	Revenue / Equity	3.08	4.13	4.16	5.66	4.83

• While Harrison company's gross margin was higher than industry average in last year, its EBITDA margin was much lower than industry average which implies that Harrison company has higher operating overheads. Also, the company's gross margin as well as EBITDA margin is lower than that of the global market leader. Accordingly, the company either needs to improve its sales realizations or reduce its COGS and / or operating overheads to align its margins towards those of the market leader. The company's EBITDA margin have declined year after year in last 3 years.
• Harrison company has lower leverage (i.e. total debt / stockholder's equity ratio) as compared to global market leader and as compared to industry average. Thus, the company is better positioned in terms of safety and also has room to borrow more to fund its growth capital requirements. However, in terms of overall gearing (where other liabilities in addition to debt are also considered), the company's leverage is better vis-à-vis industry average but marginally higher vis-à-vis market leader. Overall, the company has a largely comfortable leverage profile and is well positioned in terms of leverage. Also, based on the numbers, it is clear that the company paid back a portion of stockholders' equity 2 years ago which was partly funded through borrowing in form of other current liabilities. This resulted in increase in leverage in that particular year.
• As indicated above, current liabilities increased significantly 2 years ago for part funding of withdrawal of stockholders' equity. Also, current assets value decreased 2 years ago as part of cash was used for withdrawal of stockholder's equity. Due to this dual effect, current ratio of the company declined from 1.16x 3 years ago to 0.60x 2 years ago and improved marginally to 0.69x last year. The company needs to improve its liquidity profile by deploying larger share of its profits for funding its current assets thereby relying less on current liabilities to fund its current assets. This would bring its liquidity closer to relatively better liquidity profile of the market leader as well as industry average liquidity ratios.
• The company is less efficient vis-à-vis market leader and also less efficient vis-à-vis the industry average as its fixed assets turnover ratio and equity turnover ratio are lower. The company needs to generate higher revenues to improve these ratios.