Scandi Home Furnishings Case
Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2007. Sales during the first full year (2008) of operation reached $1.3 million. Sales increased by 15 percent in 2009 and another 20 percent in 2010. However, profits after increasing in 2009 over 2008 fell sharply in 2010 causing Kaj to wonder what was happening to his “pride and joy” business venture. After all, Kaj has continued to work as close as possible to a 24/7 pace beginning with the startup of Scandi and through the first three full years of operation. Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and uncluttered look. While this furniture style is primarily associated with Denmark, both Norway and Sweden designers have contributed to the allure of Scandinavian home furnishings.
Some say that the inspiration for the Scandinavian design can be traced to the “elegant curves” of art nouveau from which designers were able to produce aesthetically pleasing, structurally strong modern furniture. Danish furnishings and the home furnishings produced by the other Scandinavian countries—Sweden, Norway, and Finland—are made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics. Kaj grew up in Copenhagen, Denmark and received a college degree from a technical university in Sweden. As is typically in Europe, Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After “learning the trade,” he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after traveling throughout the world including the U.S., he was sure that he wanted to be an entrepreneur in the United States. Thus, while it was hard to give up the Tivoli Gardens with its many entertainment and dining activities, as well as the other attractions in Copenhagen, Kaj moved to the U.S. in early 2007. With $140,000 of his personal assets, and $210,000 from venture investors, he began operations in mid-2007.
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Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing. Following are the three years of income statements and balance sheets for the Scandi Home Furnishings Corporation. Kaj has felt that in order to maintain a competitive advantage that he would need to continue to expand sales. After first concentrating on selling Scandinavian home furnishings in the northeast in 2008 and 2009, he decided to enter the west coast market.
An increase in expenses associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen was hoping that you could help him better understand what has been happening to Scandi Home Furnishings both from operating and financial standpoints.
SCANDI HOME FURNISHINGS, INC.
2008 2009 2010
Net Sales $1,300,000 $1,500,000 $1,800,000 Cost of Goods Sold 780,000 900,000 1,260,000
Gross Profit 520,000 600,000540,000 Marketing 130,000 150,000 200,000 General & Administrative 150,000 150,000 200,000 Depreciation 40,000 53,000 60,000 EBIT 200,000 247,000 80,000 Interest 45,000 57,000 70,000 Earnings Before Taxes 155,000 190,000 10,000 Income Taxes (40%) 62,000 76,000 4,000
Net Income $93,000 $114,000 $6,000 Cash Dividends $0$74,000 $0
... . In theory, the lower a stock’s price/cash flow ratio is, the better value that stock is. 3. Market/Book ... to one with lower P/E ratio. 2. Price/Cash Flow Per share P/C ratio is a ratio used to compare a company ... the construction of highways, bridges, commercial and industrial complexes, residential homes, and a myriad of other structures, fundamental to Pakistan’ ...
SCANDI HOME FURNISHINGS, INC.
2008 2009 2010
Cash $50,000 $40,000$10,000
Accounts Receivables 200,000 260,000 360,000 Inventories 450,000 500,000600,000 Total Current Assets 700,000 800,000 970,000 Fixed Assets, Net 300,000 400,000500,000 Total Assets $1,000,000 $1,200,000 $1,470,000
Accounts Payable $130,000 $170,000 $180,000 Accruals 50,000 70,000 80,000 Bank Loan 90,000 90,000184,000
Total Current Liabilities 270,000 330,000444,000 Long-Term Debt 300,000 400,000550,000 Common Stock ($10 par)* 300,000 300,000300,000 Capital Surplus 50,000 50,000 50,000 Retained Earnings 80,000 120,000126,000 Total Liab. & Equity $1,000,000 $1,200,000 $1,470,000
Note: 30,000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scandi Home Furnishings was incorporated in mid-2007.
Your first challenge is to advise Kaj on what has been happening with Scandi Home Furnishings from a liquidity perspective.
A. Kaj was particularly concerned by the drop in cash from $50,000 in 2008 (not 2007) to $10,000 in 2010. Calculate the average current ratio, the quick ratio, and the networking capital to total assets ratio for 2008-2009
and 2009-2010. What has happened to Scandi’s liquidity position?
Note: ratio calculations involving asset items on the balance sheet are averages of the prior and current years. For example, the ratios for 2009 use average balance sheet account amounts for 2008 and 2009. Likewise, ratios for 2010 use average balance sheet account amounts for 2009 and 2010.
B. An analysis of the cash conversion cycle should also help Kaj understand what has been happening to the operations of Scandi. Prepare an analysis of the average conversion periods for the three components of the cash conversion cycle for 2008-2009 and 2009-2010. Explain was has happened in terms of each component of the cycle.
... ratio = 0. 88 times Cash ratio = $365,040 / $2,162,080 Cash ratio = 0. 17 times Total asset turnover = $20,077,000 / $15,453,900 Total asset ... | | Cash ratio| Better at managing current accounts. | May be having liquidity problems. | Total asset turnover| Better at utilizing assets. | Assets may be ... S is above the median industry ratios for the current and cash ratios. This implies the company has ...
Ratios are based on the current year’s income statement amounts and average amounts (past year and current year) for balance sheet items.
Cash Conversion Cycle (in Days):
2009 2010 Change
Cash Conversion Cycle
C. Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build, cash burn, and the net cash build/burn positions for 2009 and 2010. What, if any, changes have occurred?
Cash Build Versus Cash Burn:
Cash Burn from Inc. Stmt.
Inc. in Gross Fixed Assets
Net Cash Build (Burn)
Your second challenge is to advise Kaj on what has been happening to Scandi from a financial leverage, profitability, and efficiency perspective.
A. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to meet debt obligations in the event of financial distress, and the relative size of equity investments to debt levels. Calculate average ratios in each of these areas for the 2008-2009 and 2009-2010 periods. Interpret your results and explain what has happened to Scandi.
2009 2010 Change
B. Of importance to Kaj and the venture investors is the efficiency of the operations of the venture. Several profit margin ratios relating to the income statement are available to help analyze Scandi’s performance. Calculate average profit margin ratios for 2008-2009 and 2009-2010 and describe what is happening to the profitability of Scandi Home Furnishings.
... (visitors) # of Sales (sales) Your Average Sale (avg sale $) Your Conversion Ratio (CR) # of Visitors per Sale (VPS) Your Visitor ... Value (VV) and... (visitors) / (sales) = (CR) 1/ (CR) = (VPS) (avg sale ... products, though, you also need to calculate your average sale. So, if those four products cost $25, ...
2009 2010 Change
Gross Profit Margin0.3500
Operating Profit Margin0.1593
Net Profit Margin0.0397
C. Kaj and the venture investors are also interested in how efficiently Scandi is able to convert their equity investment, as well as the venture’s total assets, into sales. Calculate several ratios that combine data from the income statements and balance sheets and compare what has happened between the 2008-2009 and 20097-2010 periods.
Efficiency and Return Ratios:
2009 2010 Change
Operating Return on Assets0.0599
Return on Assets (ROA)0.0045
Return on Equity (ROE)0.2533
D. A ROA model consisting of the product of two ratios provides an overview of a venture’s efficiency and profitability at the same time. A ROE model consists of the product of three ratios and simultaneously shows an overview of a venture’s efficiency, profitability, and leverage performance. Calculate ROA and ROE models for the 2008-2009 and 2009-2010 periods. Provide an interpretation of your findings.
Your third challenge is to advise Kaj on what has been happening to Scandi relative to financial developments in the home furnishings industry.
A. Kaj has been able to obtain some industry ratio data from the home furnishings industry trade association of which he is a member. The industry association collects proprietary financial information from members of the association, compiles averages to protect the proprietary nature of the information, and provides averages for use by individual trade association members.
Over the 2008-2009 and 2009-2010 periods, the inventory-to-sale conversion period has averaged 200 days, while the sale-to-cash conversion period (days of sales outstanding) for the industry has average 60 days. How did Scandi’s operations in terms of these two components of the cash conversion cycle compare with these industry averages?