A Financial Analysis of Mark X

1
A Financial Analysis of Mark X

• Lynsey Cassidy
• Fred Gonzalez
• Sandra Clark
• Sabrina Chamberlain

2
An Overview of Mark X

• Manufacturer of farm and specialty trailers.
• National and international expansion.
• 85 of United States sales concentrated in the
  west and California.
• Financing provided by Wells Fargo Bank

3
Changes within Mark X

• Lowered Prices
• Relaxed Credit Policies
• No changes in production runs.
• Contractual Bank Minimums

• Maximum Credit
• Inventory
• Accounts Receivable
• Days Sales Outstanding

4
Historical and Pro Forma Ratios
5
Return On Equity

• ROE- Extended DuPont Equation
• 1990 Net Income/Common Equity 28.26
• 1991 16.68
• 1992 1.96
• Industry Average 17.50

6
Graphical Representation of ROE
7
Return on Assets

• ROA Net Income/Total Assets
• 1990 16.82
• 1991 8.95
• 1992 .79
• Industry Average 8.80

8
Graphical Representation of ROA
9
Why Bankruptcy is Inevitable
10
Why Bankruptcy is Inevitable

• Minimum Contractual Standards Issued by Wells
  Fargo
• Current Ratio 2.0
• Quick Ratio 1.0
• Total Debt to Total Assets 55.00

11
Current and Quick Ratios
12
Total Debt to Total Asset Ratio
13
Why Bankruptcy is Inevitable

• Ratios decrease over time and they are not
  sufficient to meet contractual bank standards.
• 1992 Inventory level at its highest.
• 1992 Accounts Receivable are too large.
• 1992 Accounts Payable are large.

14
Times Interest Earned Ratio

• Extent Operating Income Can Decline With Respect
  to Interest Payments
• Mark Xs TIE Ratio 1.42
• Industry Average 7.70
• No Margin of Safety
• Wells Fargo views TIE as indicator of bankruptcy

15
Inventory Averages for 1992
16
Profitability Ratios
17
Necessary Financial Changes for Mark X
18
Company Projections

• Projected Sales Growth
• 1993 10
• 1994 15
• Projected Price to Earnings Ratio
• 1993 10
• 1994 12

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Proposals for ChangeDecrease

• DSO
• Inventory
• Administrative Selling and Miscellaneous Expenses

• Cost of Goods Sold
• Accounts Payable
• Dividends
• Withhold cash dividends in 1993 and 1994

20
Sales Growth v. Cash
21
Reductions in DSO

• 1992 DSO 53.99
• Objective
• Reduce Mark Xs DSO to industry average of 32
• Results
• Accounts Receivable reduced
• More cash available

22
Reductions in Inventory

• Current Inventory Turnover 3.58
• Reduce to industry average of 5.70
• Cut Production Runs
• More cash available

23
Reductions in Expenses
24
Operating Expenses

• Reductions result in
• increased EBIT
• increased NOPAT
• increased NI

25
Dividends

• Withhold Dividends until firm is more financially
  stable
• increases credibility with Wells Fargo
• cash can be reinvested back into Mark X

26
1993 Pro Forma Ratios

• Current Ratio
• 86,175/49,904 1.73
• Quick Ratio
• (76,175-31,163)/49,904 1.10
• Total Debt to Total Assets
• 61,571/106,307 57.92

27
1994 Pro Forma Ratios

• Current Ratio
• 103,208/53,029 1.95
• Quick Ratio
• (103,208-34,751)/53,029 1.29
• Total Debt to Total Assets
• 64,486/122,394 52.69

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Resolutions and Possible Outcomes

• Excess Cash
• Where to employ?
• Payoff Short Term Loans
• Marketable Securities at 7
• Pay Dividends in future

29
Short Term Loans

• Payoff Short Term Loans
• 24,608 in Short Term Loans
• Minimum cash balance is 5 of Net Sales
• 1993
• 215,305.0510,765.25
• 35,874-10,765.2525,108.75
• 1994
• 247,601.0512,380.05
• 35,473-12,380.0523,092.95

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Ratio Comparison
31
Results of Reduction in ST Loans

• Paying off Short Term Loans
• Reduces Interest Expense
• Increases Net Income
• Increases Retained Earnings
• Increases Earnings Per Share
• However it also Increases Taxes

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Thank YouAre There Any Questions?