- •Exhibit 1. Screening Ratios
- •Exhibit 2. Growth Ratios, y-t-y percentage changes
- •Exhibit 3. Financial Analysis (1/2)
- •Exhibit 4. Financial Ratio Analysis (2/2)
- •Exhibit 5. Calculation of Additional Fund Needed
- •Exhibit 6. Price Performance
- •Exhibit 7. Calculation of Altman's z-score model
- •Exhibit 8. Calculation Recovery Solvency Ratio
- •Exhibit 9. Computation of Future Cash Flow (1/3)
- •Exhibit 10. Computation of Future Cash Flow (2/3)
- •Exhibit 11. Computation of Future Cash Flow (3/3)
- •Exhibit 12. Forecast of Adjusted Future Cash Flow
FM 4-1 , Drachuk A., Ovinova E., Lebedeva J.
This summary paper contents the analysis of Coleco Industries, INC. opportunities to avoid its bankruptcy and further acquisition by Hasbro in the end of 1980s.
Coleco Industries was the fifth-largest toy manufacturer in the United States. Some of Coleco’s well-known products include Cabbage Patch Kids, plush Alf dolls, Potato Pals and play sets based on popular TV series.
Conducting ratio analysis will help focus more on Coleco’s underlying strengths and weaknesses.
Exhibit 1. Screening Ratios
|
1980 |
1981 |
1982 |
1983 |
1984 |
1985 |
1986 |
1987 |
Sales/Accounts Receivable |
11,834 |
8,383 |
4,734 |
3,775 |
3,749 |
7,736 |
3,100 |
2,565 |
Sales/Inventory |
5,442 |
4,176 |
7,381 |
3,623 |
8,961 |
19,080 |
6,365 |
7,475 |
Declining Asset Turnover (Sales/Assets) |
2,056 |
1,791 |
1,785 |
1,249 |
1,992 |
1,952 |
0,847 |
0,942 |
The Sales/Accounts Receivables number is decreasing meaning that accounts receivable are getting larger. So, Coleco is collecting their accounts receivable slower from year to year.
Sales/Inventory is on an upward trend with strong fluctuations during the 80s, As a general rule, the higher the inventory turnover ratio, the more efficient the operation, but extremely high number in 1985 indicates that the firm might be unable to fulfill large and sudden orders, and will missing sales in some instances. This scenario’s illustrated by sales decreasing in 1986.
The Declining Asset Turnover is steadily decreasing which indicates that the assets are used without resulting in sales’ growth.
Exhibit 2. Growth Ratios, y-t-y percentage changes
|
1980-1981 |
1981-1982 |
1982-1983 |
1983-1984 |
1984-1985 |
1985-1986 |
1986-1987 |
Accounts Recievable |
54,26% |
407,64% |
46,58% |
30,81% |
-51,47% |
60,98% |
21,80% |
Sales |
9,28% |
186,68% |
16,87% |
29,90% |
0,15% |
-35,48% |
0,76% |
Inventories |
42,41% |
62,21% |
138,13% |
-47,48% |
-52,97% |
93,41% |
-14,21% |
The current ratio shows negative evaluation because of a greater increase in current liabilities compared to a slight increase in current assets, thus forcing the firm to decrease its liquidity. Through the quick asset ratio we found that the company is in bad standing with credit. The negative accounts receivable turnover shows the company is unable to turnover its sales on credit faster to gain more liquidity. With a positive increase in inventory turnover and negative accounts receivable turnover, the company hasn’t been able to use its working capital growth.
Exhibit 3. Financial Analysis (1/2)
|
1980 |
1981 |
1982 |
1983 |
1984 |
1985 |
1986 |
1987 |
8 Yr. AVG |
Liquidity |
|||||||||
Current Ratio |
2,669 |
2,212 |
2,068 |
1,360 |
1,333 |
2,583 |
1,368 |
1,075 |
1,834 |
Quick Ratio |
1,296 |
0,957 |
1,498 |
0,810 |
0,979 |
2,240 |
1,094 |
0,859 |
1,217 |
Cash (in thousands) |
11 765 |
7 749 |
52 474 |
5 931 |
1 506 |
110 734 |
82 483 |
34 633 |
38 409,375 |
Cash as a % of C.A. |
20,21% |
10,32% |
20,91% |
1,46% |
0,46% |
36,23% |
20,96% |
10,34% |
0,151 |
NWC (in thousands) |
36 394 |
41 164 |
129 607 |
107 777 |
81 310 |
187 318 |
105 757 |
23 430 |
89 094,625 |
NWC less Cash |
24 629 |
33 415 |
77 133 |
101 846 |
79 804 |
76 584 |
23 274 |
-11 203 |
50 685,250 |
Working Capital Turnover |
4,476 |
4,325 |
3,938 |
5,535 |
9,530 |
4,143 |
4,734 |
21,531 |
7,276 |
WC less Cash Turnover |
6,614 |
5,328 |
6,617 |
5,857 |
9,710 |
10,133 |
21,511 |
x |
8,221 |
Profitability |
|||||||||
Net Profit Margin |
8,00% |
4,33% |
8,80% |
-1,25% |
-10,30% |
8,28% |
-22,22% |
-20,88% |
-3,16% |
Operating Margin |
16,43% |
10,07% |
18,64% |
-0,88% |
8,85% |
15,37% |
-14,96% |
-9,08% |
5,56% |
Gross Margin |
40,09% |
35,31% |
45,17% |
32,31% |
34,87% |
47,49% |
35,97% |
35,47% |
38,34% |
ROA |
16,46% |
7,76% |
15,71% |
-1,56% |
-20,52% |
16,15% |
-18,81% |
-19,67% |
-0,56% |
ROE |
33,27% |
16,24% |
48,46% |
-8,31% |
-760,03% |
62,74% |
1451,58% |
125,01% |
121,12% |
ROIC |
27,93% |
13,09% |
38,81% |
-2,17% |
-31,36% |
36,84% |
-32,05% |
-30,84% |
2,53% |
Tax Rate |
43,57% |
42,73% |
47,46% |
70,09% |
10,50% |
30,81% |
5,42% |
0,00% |
31,32% |
Coleco has consistently declined its net income and operating margins. However, gross margins have remained at pretty constant rate, which indicates that company’s making profit after paying off its Cost of Goods sold despite declining in Sales. Hence, the reasons of slackening Coleco’s financial position are enormous growth of Selling, General & Administrative Expense (333,56%) and increasing degree of dependency of the company on borrowings (up to 309,69% change on Interest Expense by 1987 above the same position in 1980) against sales only three times sales growth. In addition, Coleco suffered a huge loss in 1984 caused by disposition of ADAM.
Overall, in terms of profitability despite ROA’s strong performance early in the observed period, it has failed to maintain positive value till the end of period (except 1985). The extraordinary values of ROE in 1984, 1986 and 1987 are explained by low level and negative values of total equity in pointed years. To avoid such distortions return on equity would be calculated below. The decrease of return on invested capital through the period shows inefficiency at allocating the capital giving a sense that Coleco’s using money without generation returns.
Probably, one of the Coleco weakness’ drivers might be a high Tax Rate aggravating the decrease by cutting the net income margin till the end of 1984.
Coleco has a negative asset management analysis, with slowdown of all turnover ratios. The decrease in account receivable (growth of Average Collection Period) turnover is the most negative factor in the liquidity evaluation. The lack of free cash for covering liabilities causes delays in payoff with the creditors’ bills. Hence, the total value of long-term debts increases through the period. Growth of company’s dependency on borrowings’ illustrated by Liabilities-to-Equity enlargement till the negative values in 1986 and 1987. So, Coleco has increased its reliance on debt as a form of financing over the period. This resulted in pressure on stock price and reduction of refinancing opportunities. Additionally, Coleco also manages to pay off its debts. With decrease in operating profit it cuts the times interest rate, and causes further growth of liabilities. By the primary part of long-term debts in the capital structure growth of net working capital doesn’t result in net income increase.