statement analysis

Book multinational business finance 10th edition by

David K Eiteman

Some example for Chapter 22 can be found at

HYPERLINK "http://www.aw.com/eiteman" www.aw.com/eiteman

use the following information for answering problems 1-4

Hong Kong tool company is a locally owned creator and distributor of
mater tooling of all kinds Although the company designs and markets it
does not manufacture itself. Instead most of the machine tools it sells
are manufactured in China (across the boarder from HK in Guangdong
Province) like most other major tool companies in the world. Although
privately owned, the company had been trying to clean up its financial
performance in the hops that the family can actually sell the company in
the near future. The income statement and balance sheets for Hong Kong
tool company that follow cover the most recent three year period.

Income statements for HK tool company
(thousands of HK$)

Income items Year 1 Year2 Year 3

Sales revenues (net) 171,275 187,500 244,900

Cost of sales (cogs) (131,295) (143,810) (187,255)



Gross profit 39,980 43,690 57,675

Selling and admin expenses (27,800) (29,700) (36,765)

Operating profit (EBITDA) 12,180 13,990 20,910

Depreciation expenses (4,650) (4,800) (5,700)

Earnings before interest (EBIT) 7,530 9,190 15,210

Interest expenses (1,960) (2970) (6,125)

Earning before taxes (EBT)

5,570 6,220 9,085

Hong Kong corporate tax

(919) (1,026) (1,499)



Net income 4,651 5,194 7,586



Balance sheets for Hong tool company (thousands of
HK$)



Assets Year 1

Year 2

Year 3





Cash and marketable securities 6,588

7,750

2,400



Accounts reciveable

22,475

24,800

33,325



Inventories 27,125 29,450 42,550

Pre paid expenses

387

925

1,163



Current assets

56,575

62,925

79,438



Net fixed assets 24,025 19,225 18,600

TOTAL ASSETS 80,600 82,150 98,038

LIABITIES AND NET WORTH



SHORT TEM DEBT 17,900 18,580 27,774

ACCOUNTS PAYABLE 14,610 15,500 19,850

Accrued expenses 3,100 3,705 5,108

Current liabilities

35,610

37,785

52,732



Long term debt

6,240

5,200

3,320



Owners equity 38,750 39,165 41,986

Total liabilities and net worth 80,600 82,150 98,038



Hong Kong tool company net work capital. A major initiative pursued by
management at Hong Kong tool in the past three years has been to
increase the effective ness of operations and financing by reducing the
total invested capital in the business.

if HK tool defines total invested capital as the sum of cash, net
working capital (NWC) and net fixed assets how had total invested
capital changed over the pas three years?

Net working capital efficiency is also typically measured as the ration
of sale to NWC. Is HK tool generating more sales per unit of (NWC) in
year three than it did in year 1?

HK tool ROIC. Many firms use different financial performance metrics as
indicators of performance and efficiency; HK tool prefers return on
invested capital (ROIC) . if the company defines ROIC as the earning
before interest and taxes (EBIT) divided by the total invested capital
(cash plus net working capital plus net fixed assets) calculate HK tool
ROIC over the past three years.

HK tool cash conversion cycle. HK tool is concerned that ii may not be
actually increasing the efficiency of its cash conversion cycle, the
basic components of the total net working capital being utilized by the
company. Calculate the number of days of sales represented by each of
the components of net working capital for the three year period. Which
components of NWC seem to need additional managerial attention?

HK tool Dupont method. Similar to the evaluation employed in the ROIC
analysis in problem 3 the management of HK tool wishes to evaluate the
basic income statement and balance sheet components that are driving the
company ROIC. Using the following traditional formulation of the basic
Dupont method for financial analyses decompose the basic elements of HK
tools three year performance.

EBIT X SALES
= RETURN ON

SALES INVESTED CAPITAL INVESTED
CAPITAL (ROIC)