Project Financial Analysis of Salton Inc - Assignment Example

Running Head: PROJECT FINANCIAL ANALYSIS Student name: Student number: Course title: Lecturer: Date: PROJECT FINANCIAL ANALYSIS OF SALTON INC. 1. Consider the competitive forces at work in the small-appliance industry. Do you think Salton can sustain its unusually high profits and return on equity on this industry? The competitive forces of Salton Inc. are as shown in the table below (The Business week, Issues, P 49-53) Bargaining Power of Suppliers Power of suppliers comprises of all the forces which are essential for the suppliers to have either high or low bargaining power. In the case of Salton Inc. the bargaining power is high. This has resulted due to high switching cost from the company’s product to other competitor’s product in the market. In addition, the products offered by Salton Inc. have low substitutes in the market. Bargaining Power of Customers This is very sensitive because it determines the company’s performances in terms of sales volume. The Salton Inc. is in a position to sustain its unusually high profits and return on equity on this industry because the customers who are targeted are not price sensitive. In fact the customers can clearly differentiate the products from those offered by competitors in the market. Threat of New Entrants Due to constant and consistent introduction of new features in the products provided by Salton Inc. new entrants has found more difficult to enter into the market. The company has a large share of the market and has won the loyalty of customers. This strategy of improving the quality of products as enabled the Salton Inc. to sustain its unusually high profits and return on equity on this industry (Pederson, p. 79) Threat of Substitutes This competitive force does not exist in the Salton company because the company has close customer relationship and high switching cost which customers faced incase they decide to switch. 2. For comparison purposes, the online exhibits for the case give a ratio analysis from eVal for four of Salton,s competitors: Applica, Maytag, Sunbeam and Whirlpool. Based on the Dupont analysis, how has Salton generated such a large return on equity relative to these other firms? Do you see any noteworthy changes or trends in Salton’s ratios over time? Salton Inc. has been able to perform well in the market despite of high competition from companies such as Applica, Maytag, Sunbeam and Whirlpool. Some of the strategies used by the company to maintain its leadership position in the market include the reduction in cost of production which enables lowering of the prices of products offered by the company. Furthermore, the company entered into licenses agreements with foreign companies such as White Consolidated Industries, Inc. which has not only helped to increase the number of customers targeted in the market but also increase the popularity of the products in the market. Finally, the company adopts price strategy as a tool of retaining the customers in the market. Though the customers were less price sensitive, the company’s management thought that the strategy is important in defending the market share. Other strategies which Salton Inc. adopted include improved customer care services, product differentiation, personal selling etc. All these strategies have enable Salton Inc. to generate large return on equity relative to its competitors in the market (Clyde and Brown, p. 323) 3. For the past two years, Salton has stated in their management discussion and analysis that a significant sources of their sales growth has been from the George Foreman product line. Estimate what fraction of total sales is due to these products? From the analysis of income statement shown in the table below, it is evident that George Foreman product line contributed large share of the sales amount. According to Labash, p. 353 the increase in sales value for the year 2000 and the year 1999 was $ 331186. This amount can be converted into a fraction of total sales made in 2000. Year: 2000 Year: 1999 Sales amount =$ 837302 Sales amount =$ 506116 George Foreman product line contributed $ 331186 = 0.4 or 40% SALTON Inc. CONSOLIDATED STATEMENTS OF OPERATIONS As at 1st July 2000, 1999 and 1998 $ $ $ 2000 1999 1998 Sales 837302 506116 305599 Cost of sales 467250 285526 179376 Distribution expenses 37639 21621 12327 Gross Profit 332413 198969 113896 Operating expenses Technology and content - - - General and Administrative 156749 129588 84216 Marketing fulfillment R/D Operating Income or Loss 175664 69381 29680 Other incomes 8972 EBIT 146903 53863 32186 Expenses on Interest 55087 19320 12205 Net income 91816 34543 19981 Common equivalent shares outstanding 15526 14562 20256 Net income per common share: basic 8.18 3.21 1.02 Net income per common share: diluted 5.91 2.37 0.99 4. The deal with George Foreman has both real economic effects and cosmetic accounting effects that will bear upon your forecast of Salton’s future income. Discuss each. How will the deal with George Foreman change the relationship between sales and other income statement items? Licensing agreement between the George Foreman and Salton Inc. has various economic effects and cosmetic accounting effects on the forecasted income of the company. Some of the economic effects are the reduction in cost while entering a foreign market. In this agreement, Salton Company will be in a position to skip some of the stages in product development. This will help the company to offer its product at the reduce price. The company will also avoid extra expenses which occurs as a result market research. The deal with George Foreman will also assist the company since the company will not be required to go through registration process of the business in foreign countries (Theodore, p. 114) However, there are various cosmetic accounting effects that will appear upon your forecast of Salton’s future income. This consequence will occur as a result of the fees which must be paid to Company, George Foreman. Furthermore, the Salton Inc. will be required to follow the regulations which will be set by the George Foreman. Such alterations might affect the company’s objectives and its values. AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) as at 31st December 2010 2010 2009 2008 Cash Flow from Operating Activities $ $ $ Cash and cash equivalents, beginning of period 91,816 34,543 19,981 Amortization deferred income taxes 1,793 4,109 (1,428) Loss (gain) on sale of marketable securities, net (8,972) Changes in debtors (33,671) (12,176) (17,578) Changes in Inventories 75,106) (26,406) (34,537) Changes in Payables (5,884) 14,716 1,599 Accrued expenses (837) (1,032) 3,245 Changes in Other Working Capital 465 344 244 Unearned revenue 339 116 72 Net cash provided by operating activities 5,645 15,192 (25,102) Disposal of Short Term Investments 19,072 Purchase of fixed assets (13,976) (5,390) (4,565) Investments in equity-method investees (22,750) * * Expenses on Investments (Long Term) * (737) * Expenses on Investments (Short Term) (9,615) * * Acquisition of business (108,126) Net cash provided by investing activities (47,078) (113,516) 14,507 CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayment) proceeds from revolving line of credit 36,367 (20,475) 12,498 Repayment of long-term debt (625) (90,125) Income from long-term loans 260,000 settlement of creditors (125) (5,433) Refinancing cost (616) (8,065) 1,133 Issued of common stocks in the market 2,669 1,489 445 Disposal of stocks 40,000 Purchase of treassecurities (70,799) Costs associated with preferred stock issuance (2,999) Net cash from financing activities 37,795 108,901 8,643 5. Suppose you believe that the George Foreman trademark is grossly overvalued in Salton’s books; in fact, rather than its book value of approximately $ 113.9 million ( $ 122 million less $ 8.1 million in amortization), you believe it is worthless. Discuss the different ways you could express this believe in our forecast inputs to eVal. If the George Foreman trademark is grossly overvalued in Salton’s books, there would be differences in the accounting records of the two companies. This will lead to common errors which will occur while preparing financial statement such as cash flows transaction, balance sheet, and income statement. Other accounting errors which might occur as a result of overvaluing of figures include errors of commission, errors of omission, errors of principals, etc. such errors can be rectified within the trading period or even in the following trading period. For example, in Salton Inc. the accountant normally opens suspend account whenever she or he realizes that the trial balance is not balancing as it should be (Stice and Earl, 124) 6. Load the case data for Salton into eVal. Change the valuation date to be September 30, 2000, roughly the release date of the fiscal 2000 10-k. if you leave everything else at the default eVal levels, the resulting value estimate is approximately $ 1,400 per share. Modify the forecast assumption to represent a more realistic scenario. If you believe the Foreman trademark is overvalued, you also want to modify the financial statements to correct for this distortion. Putting it all together, is Salton still an undervalued stock? Following tables shows the performance of Salton Inc. it comprises of balance sheet and cash flow and the calculated ratios. This shows the performance of the company. SALTON Inc. BALANCE SHEET for the last two years. ASSETS As at 1st July, 2000 2000 1999 Current assets $ (000) $(000) Cash and Cash Equivalents 7,606 11,240 Equity investments 10,146 6,350 Debtors 129,850 96,179 Inventories 219,230 144,124 Differed income taxes 3,713 3,134 Total current assets 370,545 261,027 Fixed Assets Property Plant and Equipment 1625 928 Buildings 8079 4696 Warehouse equip 7061 6142 Office furniture 9373 6097 Molds and tooling 35749 26364 Depreciations (27244) (19576) Patents 127074 2711 Others 32,014 39,927 Total Assets 564276 328316 Liabilities Current debt 112155 32229 Creditors 35113 40997 Taxes paid 4578 Accrued expenses 21028 21865 Total Current Liabilities 172874 95091 Long term liabilities Loans 215065 182,329 Accrued expenses 2529 157 Total Liabilities 390468 277577 Share holders’ equity (deficit): Preferred stock 135 133 Retained profit 141306 49490 Treasury stock (30211) (90804) Additional paid in capital 62,572 91968 Other Stockholder Equity 6 (48) Total Stockholder Equity 173808 50,739 Net Total Assets 564276 328316 The company ratios are: Profitability ratios YEAR 2000 (332,413x100)/837,302 =39.70% YEAR 1999 (198969x100)/506116 =39.31% ROC= (EBITX100)/TCE =146,903 CE=Fixed assets+WC where WC =Total assets – Total liabilities YEAR 2000 Cost Analysis 370,545-172,874=197,697 Fixed assets +WC 197,671+193,731=391,402 (146,903X100)/391402 =37.53% YEAR 1999 Cost analysis 328,316-95091=233,225 Fixed assets +WC 233,225+193,731=426,956 (53863X100)/233,225 =23.09% ROCE CAPM=Rf+ (ERM-Rf) BL Net profit Margin= (Net profit after tax x 100)/sales YEAR 2000 YEAR 1999 (91816 X 100)/837,302 (34,543X100)/506,116 =10.97% =6.83% ROE = (Net profit after tax, pretax and dividends x 100)/Total shareholder Equity YEAR 2000 (91,816 x 100)/173,808 = 52.83% YEAR 1999 (34,543 X 100)/50,739 =68.08% References Stice, J. and Earl, K. Financial Accounting. Cengage Learning, 2007 p. 123-126 Clyde, P. and Brown, P. Financial reporting, financial statement analysis, and valuation: a strategic perspective. Cengage Learning, 2010 p. 320-324 Labash, Y. Scientific and technical organizations and agencies directory, Volume 1. Gale Research Co. p. 351-355 Pederson, J. International Directory of Company Histories. Gale, 2008 p. 78-81 Theodore, L.Distribution law: antitrust principles and practice. Aspen Publishers Online. 2000. P. 112-115 The Business week, Issues 3627-3635. McGraw-Hill, 1999: the University of Virginia Read More