Colorado Technical University Apix Printing Inc Financial Analysis Presentation Scenario: Apix Printing, Inc. Apix Printing, Inc. is a private, domestic U

Colorado Technical University Apix Printing Inc Financial Analysis Presentation Scenario: Apix Printing, Inc.

Apix Printing, Inc. is a private, domestic United States printer of periodicals, newspaper inserts, and advertising materials that accompany distributions of Sunday and weekday circulations of large metropolitan newspapers. The company, headed by chief executive officer (CEO) John Matthews, generates $450 million in revenues from three product lines (periodicals, inserts, and advertising) and has long-term contracts with several large U.S. retailers to produce weekly sales flyer inserts as well as metropolitan newspapers to produce Sunday magazine inserts and coupons. Its printing presses are characterized by offset print technology and are capable of high-capacity output; in addition, the company recently migrated to water-soluble inks, which considerably reduces manufacturing emissions.

The company’s executive team, employees, and above all, its vice president (VP) of Production, Luke Stewart, are committed to environmentally-sustainable manufacturing practices. Presently, the only substrate Apix uses is paper, specifically newsprint of various weights. Trim and waste are recycled in accordance with the company’s sustainability commitment. Manufacturing divisions are geographically aligned with customers’ locations to minimize logistics costs and response time to customer requirements; however, a centralized corporate entity administers functions such as human resources, information technology, and financial reporting. The VP of sales and administration, James Simeon, oversees administration and quality compliance among the various divisions. There are presently five manufacturing divisions: Northwest, Southwest, Northeast, Southeast, and Midwest.

Currently, Apix is only marginally profitable, and as such, the chief financial officer (CFO), Mary Francis, has indicated that external financing will be required to support a company expansion into a new segment of the printing sector: food packaging. This endeavor will require new investments in equipment as well as substrate inventory; promotional costs will also increase. In addition, Timothy Russell, the new Audit Committee Chair, has pointed out that the company’s compliance with the requirements of the Sarbanes-Oxley Act (SOX) will also cause administrative costs to increase. Following the requirements is paramount to successfully file a registration statement and to issue equity to shareholders in an initial public offering (IPO).

As the newly hired VP of finance, you report to the CFO. In this capacity, your responsibilities include preparation of financial statements, comparative analysis and benchmarking to sector performance, and the assessment of new business investment opportunities to grow Apix’s expansion endeavors in a challenging market.

Between 10-15 slides with 150-200 words in the notes page

Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

Mary Francis comes into your office later that morning.

“Good news! I think we’ve got strong potential investors!” Mary announces.
“That’s great!” you reply.
“And now, they are asking for financial information” Mary states.
“Ok, I could provide a 50-page analysis for them!” you say.
“That’s exactly what they don’t want. I’m beginning to notice that some of the investors don’t have a strong finance background, and the last thing we want to do is scare them off with too many financial figures” Mary explains. I would like for you to complete a presentation. However, I want you to keep it simple and clear. Using all 3 Financial Statements, please provide an analysis on Apix’s assets, liabilities, cash, and profit. As well, choose 2 additional components on each of the sheets, and provide your initial impression on the company financial situation. Do you think you could handle this?”
“Of course! I’ll get started on this right away.”

Mary also indicates that she would like between 10–15 slides with 150–200 words in the notes page. Apex Printing
Balance Sheets
As of December 31, 2013 and 2012
Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Land
Building & Equipment
Less: Accumulated Depreciation – Building & Equipment
Total Long Term Assets
Total Assets
000$
000$
2013
6,000
2,350
12,100
20,450
2012
5,700
2,300
6,500
14,500
25,000
20,000
300,000
300,000
(187,850) (160,000)
137,150
160,000
157,600
174,500
Liabilities and Stockholders’ Equity
Accounts Payable
Salaries Payable
Interest Payable
Short Term Notes Payable
Taxes Payable
Total Current Liabilities
4,600
0
1,500
12,000
0
18,100
3,500
2,100
0
0
5,600
11,200
Mortgate Payable
Total Long Term Liabilities
54,950
54,950
100,000
100,000
60,000
24,550
84,550
157,600
60,000
3,300
63,300
174,500
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Apex Printing
Income Statements
For the Periods Ended December 31, 2013 and 2012
Revenue:
Less: Cost of Goods Sold
Less: Depreciation Expense
Gross Margin
Selling, General & Administrative Expenses
Income Before Interest & Taxes
Interest Expense
Income Before Taxes
Income Taxes
Net Income
000$
000$
2013
2012
450,000
475,000
(324,300) (374,500)
(27,850) (26,000)
97,850
74,500
(29,100) (32,000)
68,750
42,500
(7,500)
(6,000)
61,250
36,500
(35,000) (30,000)
26,250
6,500
Apex Printing
Statement of Cash Flows
For the Period Ended December 31, 2013
000$
Cash Flows from Operating Activities:
Net Income
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation Expense
Increase in accounts receivable
Increase in inventory
Decrease in salaries payable
Increase in interest payable
Decrease in taxes payable
Increase in Short Term notes Payable
Increase in accounts payable
Net Cash Flow from Operating Activities
Cash Flows from Investing Activities:
Cash paid to purchase land
Net Cash Flow from Investing Activities
26,250
27,850
(50)
(5,600)
(2,100)
1,500
(5,600)
12,000
1,100
55,350
(5,000)
(5,000)
Cash Flows From Financing Activities:
Cash paid for mortgage
Cash paid for dividends
Net Cash Flow from Financing Activities
Net Increase in Cash
Plus: Cash Balance at December 31, 2012
Cash Balance at December 31, 2013
(45,050)
(5,000)
(50,050)
300
5,700
6,000
Financial Statement Analysis
Central to facility in corporate finance is the understanding of how financial
statements are analyzed, how firms make capital project decisions, and how
ratio analysis is used to measure financial performance. In this presentation,
you will learn about the major financial statements that companies use; you
will gain an understanding of how capital projects are evaluated and the
decision-making criteria used. Finally, financial ratios will be introduced.
Financial Statement Review
The three major financial statements used by financial analysts are the
income statement, the balance sheet, and the statement of cash flow. The
income statement contains information related to profits of the company. To
derive profits, you must know sales and costs, also found on the income
statement. The income statement is used by financial analysts to determine
how well companies are performing in key areas, such as growing revenue,
controlling costs, and generating sufficient profit margins.
The balance sheet is given its name because it must balance (assets must
equal debt plus equity). The book value of a firm is found on the balance
sheet, along with shareholders equity and liabilities. The balance sheet is
used to analyze how well management is using company assets, how much
and the type of debt a company takes on, and the value of equity ownership.
The statement of cash flow measures the cash inflows and outflows of an
organization.
It gives investors understanding of how much cash the business is
generating. Cash is generated in most businesses by the operation of the
company—this is what is called “cash from operations.” Companies have
capital expenditures, make acquisitions, and buy and sell assets. These
activities are recorded in the “cash from investing” section of the cash flow
statement. Firms must finance their activities during a given time period with
either debt or equity, and these transactions can be found on the “cash from
financing” section of the cash flow statement.
Capital Projects
Companies invest in capital projects to keep their business moving forward.
These investments are aimed at enhancing the three financial statements.
Additional profits would appear on the income statement, more assets would
impact the balance sheet, and incremental cash flow would appear on the
1
Financial Statement Analysis
statement of cash flow.
To analyze capital projects, firms use discounted cash flows, which is finding
the cash flow of a project (inflows and outflows) and translating these flows
to the present value. Once the discounted cash flows are derived, they can be
evaluated in the context of the value created for the company (net present
value, NPV) and the rate of return on the project (modified internal rate of
return, MIRR).
Firms generally undertake positive NPV projects because they create value for
the business. However, since financial resources are scarce, companies must
decide which projects to undertake. To make this decision, many companies
rank their portfolio of projects based on MIRR and invest in the highest
ranking MIRR projects that create the most value for the firm.
Financial Ratios
Financial ratios are metrics used to measure a company’s financial
performance and compare that performance to a standard—typically the
overall industry performance. Companies that consistently perform better
than industry norms are generally rewarded with higher stock prices and
lower cost of capital.
Financial ratios can be viewed in a few major categories: liquidity ratios,
profit ratios, and asset utilization and effectiveness ratios (among others).
Liquidity ratios determine how liquid companies are at any given time; that
is, they determine if a firm has enough cash to meet its financial needs. A
good measure of short-term liquidity is the current ratio. Profit ratios give an
indication of how well firms generate profits from the goods and services they
sell. An excellent measure of profit is operating profit. Asset ratios allow
investors to determine how effectively firms use the assets on their balance
sheets. A good measure of overall asset utilization is total asset turnover.
2
Core Concepts in Corporate Finance
Core Concepts in Corporate Finance
A grasp of corporate finance is critical to understanding how financial
decisions are made in the business world. Knowledge of financial concepts,
ranging from valuing assets to determining the cost of capital, is essential to
profitable decision making. In this section, you will get an introduction to
corporate finance and some of the key underpinnings of the discipline.
Introduction to the Time Value of Money
Because many business decisions that are made today will bring a financial
impact well into the future, time value of money (TVM) is core to corporate
finance. The basis of TVM is the understanding that money received today is
worth more than money received tomorrow; likewise, money paid out in the
future is less expensive than money paid out today.
Corporations examine projects based on cash flow—that is, money flowing in
or out of the corporation. The present value of these cash flows is central to
investment decision making. To determine the present value, one must
understand the time value of money.
Valuing Stocks and Bonds
The accurate valuation of assets is important to corporations because
companies buy and sell both physical and financial assets with regularity.
Naturally, appropriate tools and models must be used specifically for valuing
the assets. With respect to stock (that is, equity), one model that is used is
the dividend discount model (DDM). This model is based on the concept of a
firm that pays a dividend, has an assumed constant dividend growth rate,
and requires a rate of return on its stock based on the risk of the stock. Firms
with higher dividends, higher dividend growth rates, and lower required rates
of return are valued higher than firms that do not have these characteristics.
To value bonds, companies use the present value formula applied to cash
flow stream of bonds. In essence, the income (interest payments) and the
principal payment are discounted at the market interest rate. Higher market
interest rates translate into lower bond prices, and lower market interest
rates translate into higher bond prices.
1
Core Concepts in Corporate Finance
Investment Decision Criteria
Firms use a number of financial tools to assist in decision making about
investment projects. A few such tools are NPV, IRR, and MIRR.
•
•
•
2
NPV is net present value. It represents the value of cash flows
discounted at the cost of capital netted out, including both inflows and
outflows. Generally speaking, projects with positive NPVs are
undertaken whereas projects with negative NPVs are not.
IRR is internal rate of return, representing the rate of return on a
project that would force the negative cash flows to equal the positive
cash flows. Projects having an IRR that exceeds the cost of capital
have a positive return; projects having an IRR less than the cost of
capital have a negative return.
MIRR is modified internal rate of return. It represents the return on a
project with positive cash flows reinvested at a rate of return
determined by the company; companies typically use MIRR as a
measure of return, and rank projects by MIRR. Projects with higher
MIRRs are ranked higher than projects with lower MIRRs.
Financial Ratio Analysis
Sources of Financial Information
Financial statements are the pulse of an organization. They consist of a report
on managerial performance, managerial success or failure, and any warning
signs of either immediate or long-term danger. Sometimes these warning signs
can be determined quicker using percentages instead of dollar amounts. By
comparing percentages, it is easier to see if the percentage amounts have
increased or decreased.
The financial dealings of a business may be of interest to a number of different
groups. These different groups are management, creditors, investors, union
officials, and governmental agencies. Each of these groups has different needs,
or they need different information from the financial statements.
There are times when comparative financial statements are needed. Usually the
annual reports of a company contain comparative financial statements covering
up to 10 years. These comparative financial statements are needed to compute
financial ratio analyses.
Financial Ratio Analysis
Three widely used analytical tools are dollar and percentage changes on
statements, common-size statements, and ratios.
The dollar and percentage changes on statements are also called horizontal
analysis or trend percentages. Horizontal analysis is shown by the changes
between 2 years in both dollar amounts and percentages. A feel for the
significance of the changes that have taken place over the past 2 years can be
obtained. Trend percentages will state several years of financial information in
terms of a base year, making the base year equal 100%.
Another way to highlight key changes and trends is by using common-size
statements. This is a type of statement that shows the item in a percentage
form as well as in dollars. Each item is stated as a percentage of a total of
which that particular item is a part. These common-size statements are known
as vertical analyses.
Financial Ratios
A ratio is simply a mathematical expression of the relationship of one item to
another item. A ratio can be expressed in several ways. For example, if
clarification on the relationship between sales of $600,000 and net income of
1
Financial Ratio Analysis
$20,000 is needed, the ratio of net income to sales is stated as 1 to 30, or
1:30, or net income is 1/30 of sales. The ratio is merely a way of describing the
relationship between sales and net income in a simple form. There are
numerous ratios that can be used to determine if the organization is performing
well.
Price/Earnings Ratio
The ratio investors are the most interested in the price earnings ratio. The price
earnings ratio is the market price per share divided by the earnings per share.
This ratio indicates whether the price of stock is in line with its earnings. A
lender will be interested in the debt ratio, which indicates the percent of assets
financed through borrowings. It shows the extent of leverage being used. This
ratio is calculated by total liabilities divided by total assets.
Other Ratios
The following are some ratios that organizations use to analyze their financial
statements.
current ratio
acid test ratio
price/earnings ratio
accounts receivable turnover ratio
average collection period ratio
inventory turnover ratio
asset turnover ratio
debt to total asset ratio
debit to stockholder’s equity ratio
times interest earned ratio
gross profit rate ratio
return on total assets ratio
return on common stockholder’s equity ratio
economic value added
2
FAQ: Analysis of Financial Statements
Question 1: What are the key elements in the primary financial statements
that are used by executives for firm analysis?
The three key financial statements that business executives and financial
analysts use are the following:
•
•
•
Income statement: This lists revenue, expenses, and profits of a
corporation for any given time period (e.g., a calendar year).
Cash flow statement: This lists sources of cash inflow and outflow
for a company over a given period.
Balance sheet: This gives accounting of a firm’s assets, liabilities,
and owner’s equity for a given time period.
Question 2: How do you analyze the income statement?
The following will analyze a hypothetical income statement to help answer
this question:
Fiscal Year Results
(in thousands of U.S. dollars)
Year 1
Net Sales
340,000
Cost of Goods Sold
162,000
Gross Profit
178,000
Gross Profit Margin
52.35%
•
•
1
Year 2
360,000
167,000
193,000
53.61%
Year 3
425,000
195,000
230,000
54.12%
Revenue (net sales) increased 5.88% in the second year and 18.06%
in the third year. An increasing growth rate in revenue is good,
especially if the sources of revenue are strong and have good longterm prospects.
Cost of goods sold increased by 3.09% and 16.77% in the second and
third years, respectively. Note that the cost of goods sold increased
less than revenue; because of this, gross operating margin increased
from 52.35% in the first year to 54.12% in the third year. Gross
operating margin is found by dividing gross operating income (revenue
– cost of goods sold) by revenue.
FAQ: Analysis of Financial Statements
Depreciation
Selling Expenses
General and Administrative
Total Operating Expenses
•
•
•
2
33,000
55,000
46,000
134,000
42,000
63,000
49,000
154,000
Depreciation, selling expenses, and general and administrative
expenses make up the operating expenses. Operating expenses
increased by 6.35% and 14.93% in years 2 and 3 respectively, as
follows:
Operating Income
Operating Profit Margin
Interest Expense
Income Before Taxes
Income Taxes
Net Income
Net Profit Margin
•
29,000
52,000
45,000
126,000
52,000
15.29%
12,000
40,000
13,000
27,000
7.94%
59,000
16.39%
15,000
44,000
14,000
30,000
8.33%
76,000
17.88%
20,000
56,000
15,000
41,000
9.65%
Operating income is gross profit – operating expenses. Operating
income increased 13.4% and 28.81% in years two and three
respectively, both of which are faster than revenue growth. When
operating income is growing faster than revenue growth, operating
profit margin will increase, which is what happened in this example.
Operating profit margin increased from 15.29% in the first year to
17.88% in the third year.
Subtracting interest expense and income taxes from operating income
results in net income. Increasing net income is an important goal for
most companies. In this example, net income increased by 11.11%
and 36.67%.
Net income increased faster than revenue growth, so net income
margin increased. Net income margin is found by dividing net income
by revenue.
FAQ: Analysis of Financial Statements
Question 3: How do you analyze balance sheets?
The following balance sheet can illustrate how financial analysts evaluate
balance sheets:
(in thousands of U.S.
dollars)
Assets
Cash and Cash Equivalents
Accounts Receivable
Inventories
Prepaid Expenses
Deferred Income Taxes
Total Current Assets
Property, Plant & Equipment
Intangible Assets
Total Assets
•
•
Period Ending
Dec. 31, 2009
Period Ending
Dec. 31, 2010
%
Change
9,100
8,250
55,000
8,500
7,000
87,850
85,000
25,000
197,850
9,900
8,700
60,000
8,950
7,300
94,850
90,000
36,500
211,350
8.79%
5.45%
9.09%
5.29%
4.29%
7.97%
5.88%
6.00%
6.82%
Current assets increased by 7.97%, driven by a 9.09% increase in
inventories. This could be a positive or negative, depending on the
reason for increased inventory. If sales were increasing rapidly and
the company had to replenish inventory to keep pace with sales, then
this would be viewed as positive. On the other hand, if sales were flat
or declining and inventory was increasing, then the firm would be
buying goods that would take a longer time to sell, tying up cash in
inventory that could be used for something else.
Total assets increased by 6.82%, with a $5 million increase in
property plant and equipment. This could be caused by increased sales
and the company’s expansion of its production capabilities.
Liabilities and Equity
Current Portion of Long-term Debt
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long-term Debt
Other Long-term Liabilities
Total Liabilities
Equity
3
1,500
35,000
8,000
44,500
45,000
5,000
94,500
103,350
1,600
37,000
8,550
47,150
47,500
5,200
99,850
111,500
6.67%
5.71%
6.88%
5.96%
5.56%
4.00%
5.66%
7.89%
FAQ: Analysis of Financial Statements
•
•
•
The increase in accounts payable is the major driver of the increase in
short-term liabilities. This could be related to increased sales and,
therefore, the increase in the amount owed to vendors.
The increase in total liabilities was largely derived from the increase in
long-term debt. This is likely related to increased property, plant, and
equipment (meaning that the company may have used long-term debt
to finance the production expansion).
Shareholder’s equity increased by $8 million, or roughly 8%. Because
assets increased by $13.5 million and liabilities increased by only
$5.35 million, shareholder’s equity increased by the difference, or
$8.15 million. It is difficult to judge this value without considering net
income because financial analysts look at the return on equity (net
income / equity) to determine the meaning of the equity value (in
addition to how it was derived).
Question 4: How do analysts and executives analyze the cash flow
statement?
An example statement of cash flow is shown in the following table:
(in thousands of U.S. dollars)
Cash from Operating Activities
Net Income
Depreciation
Other
Total
Period
Ending Dec.
31, 2008
27,000
29,000
6,900
62,900
Period
Ending Dec.
31, 2009
30,000
33,000
7,300
70,300
Period
Ending Dec.
31, 2010
41,000
42,000
7,600
90,600
Cash from operating activities is the cash that is provided by the business.
For most companies, this is the largest source of cash inflow. To get cash
from operating activities, start with net income, add back noncash items
(e.g., depreciation and amortization), and subtract any operating activities
that used cash. Note the amount of deprecation relative to net income. In
asset-intensive companies, depreciation is a large component of cash flow.
4
FAQ: Analysis of Financial Statements
Cash used in Investing Activities
Capital Expenditures
Cash used in Financing Activities
Cash used for principal
pa…
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