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 Gillian’s Pool & Spa Supplies
Income
Statements
2011 2012 2013 2014 2015

Net sales $900,000 $982,500 $1,170,000 $1,310,400 $1,520,064

Cost of goods sold 729,000 801,900 962,280 1,100,736 1,305,000
Gross profit $171,000 $180,600 $207,720 $209,664 $215,064
Admin and selling exp $45,000 $58,950 $64,350 $72,072 $91,204
Depreciation 37,500 40,000 50,000 50,000 50,000
Miscellaneous expenses 3,041 3,557 4,680 14,414 22,801
Total operating exp $85,541 $102,507 $119,030 $136,486 $164,005
EBIT $85,460 $78,093 $88,690 $73,178 $51,059
Interest on ST loans $9,600 $9,600 $9,600 $17,760 $17,760
Interest on LT loans 5,400 5,400 5,400 13,500 16,470
Interest on mortgage 16,000 13,840 12,240 21,440 21,120

Total interest $31,000 $28,840 $27,240 $52,700 $55,350

Before-tax earnings $54,460 $49,253 $61,450 $20,478 ($4,291)

Taxes 21,784 19,701 24,580 8,191 -1,716
Net income $32,676 $29,552 $36,870 $12,287 ($2,574)
Dividends on stock 0 0 0 0 0
Additions to
retained earnings $32,676 $29,552 $36,870 $12,287 ($2,574)

EPS (100,000 $0.33 $0.30 $0.37 $0.12 ($0.03)

shares)

2-2

©2018 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Questions

1. Calculate Gillian Pool and Spa Supplies’ average annual compound growth rate

of sales and analyze its earnings performance for the past 5 years.

Gillian Pool and Spa Supplies’ sales have increased by an average compound rate of

14% per year over the past five years. In comparison, its net income has declined

from over $32,676 in 2011, to a loss of $2,574 in 2015.

2. In order to shed some light on the firm’s financial condition, which statements

should Denny analyze and which measures/calculations should he use so as to

compile a detailed report. Please explain why.

Denny should refer to the income statement and the balance sheet over the past 3-5

year period. In addition, he should prepare a cash flow statement, common size

income statement and common size balance sheet. Denny should calculate the

various liquidity, leverage, profitability, activity, and coverage ratios for at least a

three-year period. In addition, a Du Pont analysis of the return on equity will help

determine what has affected the profitability of the company.

The accounting statements provide the raw data from which the other statements can

be prepared and the various ratios calculated. The cash flow statement helps

determine where the cash came from and where it was spent during a year. The

common size statements provide useful information regarding the relative trends of

the various assets, liabilities, revenue sources, and expense items. They also help the

analyst make meaningful comparisons between firms of varying sizes.

2-3

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
3. Realizing that comparison with an appropriate benchmark is a key component

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

benchmark?

Based on Gillian Pool & Spa Supplies’ industry classification code, Denny should

collect industry averages of the key financial ratios. Some useful sources for

industry ratios include: Value Line, Moody’s, Standard & Poor, and Dun &

Bradstreet. In addition to the industry average, the industry leaders’ (within the size

category) ratios could also be collected from the Internet (e.g. Marketguide.com) and

used for comparison.

2-4

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
4. While attending his MBA finance class, Denny had learned that doing a

common size analysis and DuPont analysis are very useful first steps when

analyzing a company’s health. Using the 5-year financial statements help

Denny perform such analyses and comment on the findings.

The common size income statements and balance sheets for the 5 year period 2011-

2015 are presented in the following 2 tables.

Gillian Pool & Spa

Supplies
Income
Statement

2011 2011% 2012 2012% 2013 2013 % 2014 2014% 2015 20 15%

Net sales $900,00 100.0 $982,50 100.0 $1,170,00 100.0 $1,310,40 100.0 $1,520,06 100.0%
Cost of goods sold 0729,00 %81.0% 0801,90 %81.6 0 962,28 %82.2 01,100,73 %84.0 41,305,00 85.9%
0 0 % 0 % 6 % 0
Gross profit $171,00 19.0% $180,60 18.4 $207,72 17.8 $209,66 16.0 $215,06 14.1%
0 0 % 0 % 4 % 4
Admin and selling $45,00 5.0% $58,95 6.0% $64,35 5.5% $72,07 5.5% $91,20 6.0%
exp 0 0 0 2 4
Depreciation 37,50 4.2% 40,00 4.1% 50,00 4.3% 50,00 3.8% 50,00 3.3%
Miscellaneou 03,04 0.3% 03,55 0.4% 04,68 0.4% 0
14,41 1.1% 0
22,80 1.5%
s expenses 1 7 0 4 1
Total operating exp $85,54 9.5% $102,50 10.4 $119,03 10.2 $136,48 10.4 $164,00 10.8%
EBIT 1
$85,46 9.5% 7$78,09 %7.9% 0$88,69 %7.6% 6$73,17 %5.6% 5$51,05 3.4%
Interest on ST loans 0$6,00 0.7% 3
$17,40 1.8% 0
$16,80 1.4% 8
$17,76 1.4% 9
$17,76 1.2%
Interest on LT loans 05,70 0.6% 0 8,82 0.9% 017,64 1.5% 017,10 1.3% 016,47 1.1%
Interest on mortgage 3
14,00 1.6% 0
13,84 1.4% 0
21,68 1.9% 0
21,44 1.6% 0
21,12 1.4%
0 0 0 0 0
Total interest $25,70 2.9% $40,06 4.1% $56,12 4.8% $56,30 4.3% $55,35 3.6%
3 0 0 0 0
Before- $59,75 6.6% $38,03 3.9% $32,57 2.8% $16,87 1.3% ($4,291 -0.28%
tax earnings 7 3 0 8 )
Taxes 23,90 2.7% 15,21 1.5% 13,02 1.1% 6,75 0.5% - -0.11%
Net income 3
$35,85 4.0% 3
$22,82 2.3% 8
$19,54 1.7% 1
$10,12 0.8% 1,716
($2,574 -0.17%
Dividends on stock 4 0 0 0 2 0 7 0 ) 0
Additions to
retained earnings $35,85 $22,82 $19,54 $10,12 ($2,574
EPS (100,000 4 $0.3 0 $0.2 2 $0.2 7 $0.1 ) ($0.03
shares) 6 3 0 0 )

The common size income statement indicates that the firm’s cost of goods sold has

increased quite a bit since 2011 (from 81% to 85.9%). Miscellaneous expenses (0.3% to

1.5%), interest charges (2.9% to 3.6%) and selling and administration expenses (5% to 6%)
2-5

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 have also increased slightly. The firm needs to look into its cost structure and try and

reduce the overall costs of doing business.

Common Size Balance Sheets

2011 2011% 2012 2012% 2013 2013% 2014 2014% 2015 2015%
ASSETS
Cash and marketable
securities $60,000 10.96% $86,693 14.67% $75,948 13.23% $58,000 6.62% $12,500 1.38%
Accounts receivable 15,000 2.74% 21,859 3.70% 30,000 5.23% 50,000 5.70% 82,000 9.05%
Inventory 250,000 45.66% 300,000 50.76% 335,437 58.45% 485,984 55.45% 579,134 63.91%

Current assets $325,000 59.36% $408,552 69.12% $441,385 76.91% $593,984 67.77% $673,634 74.34%

Land, buildings, plant,

and equipment $300,000 54.79% $300,000 50.76% $300,000 52.28% $500,000 57.05% $500,000 55.18%
Accumulated depreciation -77,500 -14.16% -117,500 -19.88% -167,500 -29.19% -217,500 -24.82% -267,500 -29.52%

Net fixed assets $222,500 40.64% $182,500 30.88% $132,500 23.09% $282,500 32.23% $232,500 25.66%

Total assets $547,500 100.00% $591,052 100.00% $573,885 100.00% $876,484 100.00% $906,134 100.00%
LIABILITIES AND EQUITIES

Short-term bank loans $80,000 14.61% $80,000 13.54% $80,000 13.94% $148,000 16.89% $148,000 16.33%
Accounts payable 20,000 3.65% 22,000 3.72% 24,000 4.18% 37,000 4.22% 39,000 4.30%
Accruals 10,000 1.83% 11,000 1.86% 12,963 2.26% 17,276 1.97% 18,500 2.04%

Current liabilities $110,000 20.09% $113,000 19.12% $116,963 20.38% $202,276 23.08% $205,500 22.68%

Long-term bank loans $60,000 10.96% $60,000 10.15% $60,000 10.46% $150,000 17.11% $183,000 20.20%
Mortgage 200,000 36.53% 173,000 29.27% 153,000 26.66% 268,000 30.58% 264,000 29.13%

Long-term debt $260,000 47.49% $271,000 45.85% $213,000 37.12% $418,000 47.69% $447,000 49.33%

Total liabilities $370,000 67.58% $384,000 64.97% $329,963 57.50% $620,276 70.77% $652,500 $1

Common stock (100,000 shares) $125,000 22.83% $125,000 21.15% $125,000 21.78% $125,000 14.26% $125,000 13.79%
Retained earnings 52,500 9.59% 82,052 13.88% 118,922 20.72% 131,208 14.97% 128,634 14.20%

Total equity $177,500 32.42% $207,052 35.03% $243,922 42.50% $256,208 29.23% $253,634 27.99%

Total liabilities
and equity $547,500 100.00% $591,052 100.00% $573,885 100.00% $876,484 100.00% $906,134 100.00%

The common size balance sheet (shown below) shows that the firm’s inventory and

accounts receivables levels have gone up sharply, while its cash balance has significantly

declined. Fixed assets have increased over the past 5 years. The firm has taken on

significantly larger amounts of short and long-term debt relative to its total assets. Total

equity has decreased from 32.42% of total assets to around 28%. As a result its capital

structure has become more leveraged.

2-6

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Du Pont Analysis 2011 2012 2013 2014 2015

Net Profit Margin 3.98% 2.32% 1.67% 0.77% -0.17% Gillian

Total Asset
Turnover 1.40625 1.24194 1.17476 1.341963 1.5694985 Pool’s ROA
Equity Multiplier 1.901175 2.2006 2.754136 2.8288681 2.806588
has Return on Assets 5.60% 2.88% 1.96% 1.04% -0.27% is currently
Return on Equity 10.65% 6.35% 5.40% 2.93% -0.75%
negative and

has decreased significantly since 2011. Most of the decrease has come from the deteriorating profit

situation. The firm’s total asset turnover has improved consistently since 2013.

The firm’s ROE has suffered significantly since 2011. This has occurred largely due to the steep

drop in net profit margin. Had the firm not had such a high equity multiplier (from its high level of

debt), the ROE situation would have looked considerably worse.

5. Analyze Gillian Pool’s liquidity, asset utilization, long-term solvency, and profitability

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

grant Gillian Pool & Spa Supplies the loan?

2-7

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 2011 2012 2013 2014 2015 Comme nts

Current Ratio 6.38 3.68 3.56 3.62 3.79 Good

Quick Ratio 2.54 2.00 0.57 0.61 0.62 Poor
Cash Ratio 2.38 1.92 0.45 0.17 0.10 Low
Total Debt Ratio 0.47 0.55 0.64 0.65 0.64 High
Debt-Equity Ratio 0.90 1.20 1.75 1.83 1.81 High
Equity Multiplier 1.90 2.20 2.75 2.83 2.81 High
Times Interest Earned Ratio 3.32 1.95 1.58 1.30 0.92 Low
Cash Coverage Ratio 4.78 2.95 2.47 2.19 1.83 Declining
Inventory Turnover ratio 2.92 2.97 1.92 2.12 2.33 Lower
Day's sales in Inventory 125.17day 122.9day 189.65day 172.43day 156.63day High
Receivables Turnover s 90.00 s 81.88 s 58.50 s 16.88 s 16.87 Relatively low
ACP or Days' Sales in bles4.06 4.46 6.24 21.63 21.63 Gone up
Receiva
Total Asset Turnover days 1.41 days 1.24 days 1.17 days 1.34 days 1.57 significantly
Improved slightly
Capital Intensity 0.71 0.81 0.85 0.75 0.64 Dow n slightly
Profit Margin 3.98% 2.32% 1.67% 0.77% -0.17% Poor
ROA 5.60% 2.88% 1.96% 1.04% -0.27% Poor
ROE 10.65% 6.35% 5.40% 2.93% -0.75% Poor

2-8

©2018 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Liquidity:

The firm’s overall liquidity is quite good with a current ratio of 3.79 and it has

improved quite a bit over the past three years. However, much of its current assets

are tied in inventory, since its quick ratio is only 0.62. The ability of the firm to pay

off its current liabilities from its cash reserves is not very good either and has

deteriorated significantly over the past five years.

Asset utilization:

The firm’s inventory turnover is much lower than what it was back in 2011. There

was some improvement in 2013 and 2014, but there is still a lot of room for further

improvement. The receivables turnover ratio has declined as well. An average

collection period of 22 days is pretty high for a retail business. The total asset

turnover although not very high is at its highest level in five years.

Long-term solvency:

The firm’s debt ratio is 64% of total assets. Its debt level has gone up by almost

17% since 2011. Since the firm’s coverage ratios are fairly low and declining, the

firm’s financial structure can be considered to be fairly risky.

Profitability:

The firm’s profitability ratios have declined significantly in the past three years. The

firm is currently making losses.

2-9

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Arguments that can be made to get the loan:

Improving liquidity (current ratio) and total asset turnover.

Proof of better inventory management system (if possible)

6. If you were the commercial loan officer and were approached by Andy for a

short term loan of $50,000, what would your decision be?

Given the firm’s poor profitability and cash flow situation, I would not grant the

loan. However, I would tell him that if he can demonstrate improvement in

inventory management and better profitability over the next 2 quarters, we would

reconsider.

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

The firm needs to improve its inventory management, and credit collection policies.

Further, the cost of sales and miscellaneous costs should be looked into and brought

down more in line with its level in 2011. This will improve the liquidity and

profitability of the company.

8. What kinds of problems do you think Andy would have to cope with when

doing a comprehensive financial statement analysis of Gillian Pool & Spa

Supplies? What are the limitations of financial statement analysis in general?

General Problems

2-10

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Selection of comparison benchmark

Accounting procedures differ.

Different fiscal year end

Seasonal businesses

Extraordinary gains/losses

Specific Problems

Selection of appropriate benchmark/ industry averages

2-11

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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Another random document with
no related content on Scribd:
to assert—M. le Vicomte de Vieuxbois, whose father had been a friend of
his own, had been observed to converse in an agitated manner with Mrs.
Allonby, to whom, as to other pensionnaires, the Vicomte had obligingly
given Italian lessons, what more natural—Mrs. Allonby was herself a
mother, the wife of the Vicomte's father's friend; she was older than she
appeared, while M. de Vieuxbois was younger—what more natural than for
a young man, suffering from the apparent coldness and misunderstandings
of his betrothed, and far from his own mother, to seek counsel and comfort
of a lady by her age and experience eminently calculated to give them? As a
simple matter of fact, he was aware of all that had occurred; he had been
deeply interested in the course of the young man's love, which had met with
unusual, but not unnatural, obstacles, triumphantly and happily surmounted,
until this unfortunate, but truly absurd, little misunderstanding arose.
Madame probably knew that English wives had no secrets from their
husbands, so that for M. de Vieuxbois to confide in Mrs. Allonby the depth
of his passion and the misfortune of the various obstacles to its fulfilment,
was in effect to confide in himself. What a pity to let suspicions so absurd
divide two young and loving hearts! Mademoiselle's ear had doubtless been
abused by mischievous, misunderstood tittle-tattle. Girls were like that, he
knew from experience, and, having had the good fortune to win the best and
most charming of wives himself, it hurt him to think of M. de Vieuxbois
missing such a blessing—merely because of a little misconception of his
conduct—a misconception absolutely incredible in a person of Madame's
sagacity and knowledge of the world. In his anxiety for the young people's
happiness, he actually found himself forgetting the necessity for extracting
an apology for an unwarrantable act of incivility to his wife, the necessity
of which both Monsieur and Madame Bontemps would at once admit.

They did at once admit it, and with a celerity and sudden change of
front that not only took Mr. Allonby's breath away, but also that of M.
Isidore, who happened—no doubt by the merest chance—to be lounging
outside the ever open office door, intently studying the Figaro, and who
also happened to have dispatched Heinrich, the porter, on an errand, by the
latter deemed trivial and unnecessary to the last degree.

What M. Allonby had had the complaisance to observe, Madame

Bontemps blandly stated in reply, put an entirely different complexion on
the whole matter. She deeply regretted having, even in thought, wronged
Madame or M. Isidore, whom she embraced as a son—he made a grimace
over his Figaro outside at this remark—she deplored the inconvenience
suffered by Madame Allonby, and she should for the rest of her life cherish
the memory of M. Allonby as that of a valued, a beloved, an inestimable,
friend of the whole of her family.

M. Bontemps corroborated these assertions with tears of a noble and

profound emotion; Mlle. Geneviève (just then at the climax of an
explanatory and embarrassing interview with Mrs. Allonby) was promptly
summoned from the depths of the back premises at the very moment when
M. le Vicomte Isidore Augustin René Joseph Marie de Beauregard de
Vieuxbois was making a dramatic entrance from the front hall; and all was
joy, reconciliation, effusion, tears, transport, intoxication.

"It was all that little cat, Dorris," Ermengarde confided afterwards to
those fellow-conspirators, the ex-Anarchist and the woman of mystery; "so
that what she got this morning was perhaps not altogether wasted. Only I
wish she hadn't had it quite so hot."

"My conscience pricks me about de Vieuxbois' people," Arthur

confessed, when gratuitous champagne unexpectedly crowned the banquet
in the evening, and the visitors were asked by Madame Bontemps to drink
to the betrothal of M. Isidore and Mlle. Geneviève. "They won't thank me
for this afternoon's work. Just fancy a man in de Vieuxbois' position falling
in love with a girl like Mlle. Bontemps, and taking a post as general utility
person in a small hotel for her sake. Romantic young ass! The girl showed
her sense in refusing him. His mother is distracted. The whole family have
been at him about it! But the little chap would have her—Madame la
Vicomtesse!"

And when next day pack-mules waited by the place of Dorris's

execution, laden with Ermengarde's belongings, and she herself stood by
the lemon-laden trees and took a last view of the magnificent sweep of sea
below, and the splendid amphitheatre of encircling mountains above,
grasping a huge presentation bunch of roses, carnations, and heliotrope,
with a last lingering bough of mimosa bloom and one of lemon flower, and
receiving the farewells of the visitors, the salutations of the family and the
betrothed pair, and dazzling smiles from the well-tipped Heinrich, waiters
and chambermaids at windows, Ermengarde's heart rose in her throat; she
squeezed the thin man's hand to agony point; kissed Mrs. Dinwiddie, Lady
Seaton, and Miss Boundrish's mother; nodded to the young lady's father,
Major Norris and Bertie Trevor, turned and fled through the lemon-orchard
path so that Arthur could not overtake her till she came out upon the rock-
hewn road far below, where she was discovered gazing over the clean red
roofs and dark-leaved groves of Mentone out to sea, and unobtrusively
restoring a handkerchief to its pocket.

"It—it really was such a very lovely place—such a unique charm about
it," she said in apology.

"Tell you what, old lady, we'll come again next year if the boom keeps
up," Arthur replied, lighting his pipe in the shelter of a rocky scarp. "But I
bar squabbles first."

Before them the slender tower of St. Michel, just topping the mountain
spur that hides the Old Town, gleamed white on a clear blue sea; it had
rained during the night, and some cloud-wreaths still floated round the
craggy summits, leaving light veinings of snow on the amethystine peaks;
cheery voices and sounds rose from the saw-mill niched in the bottom of a
little gorge across the torrent; the plane avenue was alive with passing
wheels and steps and people of every sort and kind, but all gay as if they
had never known a care; the sea had richer and deeper hues, the sun a
warmer gold, the soaring mountains a more majestic outline, vegetation a
more varied luxuriance and colouring; and Ermengarde, listening to
Arthur's familiar, intermittent growl, and imparting pleasant secrets to him,
was lighter of heart than ever before. The full magic and splendour of the
azure shore was at last upon her, and the exhilaration and the pure joy of
living went to her head, sparkled in her eyes, glowed in her cheeks, and
thrilled her to the very finger-tips.

And yet she was at heart, if not a sadder, at least a wiser, and hoped to
be a better, woman than before those joyous adventures on the Côte d'Azur.
 THE END

BILLING AND SONS, LTD., PRINTERS, GUILDFORD

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