FIN 330 Module 2 Financial Statement Analysis Assignment Example

Financial Statement Analysis of the Company, Fiscal 2025

[Student Name]

Southern New Hampshire University

FIN 330: Corporate Finance

Module Two Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Financial Statement Analysis of the Company, Fiscal 2025

Introduction

Before the board decides whether to spend $73 million on a propane-cooled product line, it needs to know how healthy the company is and where its money is tied up. This paper analyzes the fiscal 2025 statements of a composite Nasdaq-listed ice machine and beverage dispenser maker in Fort Wayne, Indiana. It calculates five groups of ratios, compares them with the median of three publicly traded peers in commercial foodservice equipment, breaks down return on equity, checks overall financial health and draws conclusions for the investment decision.

The Statements

In fiscal 2025 the company reported revenue of $780 million and cost of goods sold of $530 million, leaving gross profit of $250 million. After selling, general and administrative costs of $148 million and depreciation of $24 million, operating income (EBIT) was $78 million. Interest expense of $12.8 million left pretax income of $65.2 million, and tax at 25 percent left net income of $48.9 million, or $2.04 a share. The balance sheet shows total assets of $690 million, including cash of $45 million, receivables of $110 million and inventory of $135 million. Current liabilities are $140 million, long-term debt is $210 million and shareholders' equity is $340 million.

Liquidity

The current ratio, current assets of $290 million divided by current liabilities of $140 million, is 2.07, against a peer median of 1.8. The quick ratio, which excludes inventory, is 1.11, against 1.05. The company can meet its short-term obligations comfortably, but the high current ratio is partly a sign of too much inventory rather than of strength.

Efficiency

Here the company falls behind. Days sales outstanding, receivables divided by daily sales, is 51 days against a peer median of 42. Dividing cost of goods sold by inventory gives a turnover of 3.9 times, or 93 days of inventory, against peers at 75 days. Total asset turnover is 1.13 against 1.20.

Selected ratios against peer median

The cause appears in the notes. The company gives its dealer network 60-day terms, while peers mostly offer 30 or 45 days, and it carries finished machines for older refrigerant models that are selling slowly as customers wait for propane units. If receivables matched the peer collection period, the company would hold about $20 million less in receivables; if inventory matched peer days, about $26 million less in inventory. Together, about $46 million is tied up beyond what peers need.

Debt

Debt to equity, long-term debt divided by equity, is 0.62, slightly below the peer median of 0.70. Interest coverage of 6.1 times means operating income covers interest comfortably. The company has room to borrow, a point that will matter when financing the propane line is discussed in Module Six. Its debt is mostly a single issue of notes maturing in 2032, plus an undrawn $100 million revolving credit line, so it faces no large repayment in the next few years. Lenders' covenants cap total debt at three times EBITDA (operating income plus depreciation), and at $210 million against EBITDA of $102 million, the ratio is about 2.1, leaving headroom of roughly $95 million.

Profitability

The operating margin is 10.0 percent and the net margin 6.3 percent, both slightly better than peers. Return on assets, net income divided by total assets, is 7.1 percent. Return on equity is 14.4 percent, close to the peer median.

DuPont Analysis

Under the DuPont identity, ROE equals what each sales dollar earns, multiplied by sales per dollar of assets, multiplied by assets per dollar of equity. For the company, 6.3 percent times 1.13 times 2.03 gives 14.4 percent. Peers earn a lower margin, 6.0 percent, but turn assets faster, at 1.20, and borrow a little more, with a multiplier of 2.06, giving 14.8 percent. Penman (2013) recommends this decomposition because it shows whether returns come from pricing power, efficiency or borrowing. Here the company's slightly better margins are offset by slower turnover, which points again to working capital.

Market Ratios

At $40 a share, the price to earnings ratio is 19.6, above the peer median of 18.5, and the market to book ratio is 2.8. Dividends of $1.20 a share give a yield of 3.0 percent and a payout ratio of 59 percent, higher than the peer median of 45 percent. Investors appear to be paying for expected growth, which suggests the market believes the company can earn more than its cost of capital on new investment. Koller et al. (2020) explain that a company creates value only when its return on invested capital exceeds its cost of capital, and the premium valuation implies that investors expect it to do so.

Financial Health

Altman (1968) developed the Z-score to predict financial distress from five ratios. Using the company's figures, with working capital of $150 million, retained earnings of $260 million and a market value of equity of $960 million, the score is about 3.9, well above the 2.99 level Altman associated with safety. The company is not at risk of distress.

Limits of the Analysis

Ratios describe the past. They do not show how quickly the shift to propane refrigerant will make older inventory obsolete, how dealers would react to shorter payment terms or whether peers' figures reflect different product mixes. One of the three peers sells mainly to large restaurant chains that pay faster, which flatters the peer collection period. The comparison is still useful, but the working capital gap may be somewhat smaller than the raw figures suggest.

Conclusion

The company is profitable, conservatively financed and in no danger, and investors value it at a premium. Its weakness is working capital: generous dealer terms and slow-moving inventory of older models tie up about $46 million more than peers need. Tightening terms to 45 days and clearing older inventory as the propane line arrives could release a large part of that cash, which could fund much of the new line without new debt.

References

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.

Penman, S. H. (2013). Financial statement analysis and security valuation (5th ed.). McGraw-Hill.