MBAC 6060 – Spring
Financial Statement Analysis Case
The objective of this case is to review financial statement analysis and to reinforce the meanings, interpretations, and effects of financial statement ratios.
Please read the instructions below and use the associated financial statements in the Excel file to produce a group report answering the assignment question.
Please include a print-out of the financial statements/spreadsheets produced and associated write-ups. These include
· A common-size income statement and balance sheet for BurritoJoint for 2009 and 2008
· A common-size income statement and balance sheet for BurgerHaven in 2009
· Financial Ratio Analysis sheet(s) for BurritoJoint for 2009 and 2008
· Financial Ratio Analysis sheet(s) for BurgerHaven for 2009
Overview:
As a financial manager working for BurritoJoint, a NYSE-listed company, you will compose an internal financial planning and analysis report for the firm. At your disposal are the 2009 and 2008 income statements and balance sheets for BurritoJoint and the 2009 income statement and balance sheet for BurgerHaven (also a NYSE-traded firm). You also have the price of both companies’ stocks on the day that financial statements were prepared. For each portion of the analysis compare BurritoJoint’s 2009 results to its 2008 results and compare BurritoJoint’s 2009 results to BurgerHaven’s 2009 results.
Please work with your group to produce a printed report containing appropriate tables and financial statements along with relevant short written answers and insights to the questions and issues in the assigned analysis.
Background:
BurritoJoint, Inc. is a chain of fast-casual restaurants in the United States and Canada specializing in burritos and tacos. It was founded by Steve in 1993 and based in the Rocky Mountain Region.
The restaurant is known for its large burritos, assembly line production, and use of natural ingredients. The company released a mission statement called Food with Integrity, which highlights its efforts in using organic ingredients, and serves more naturally raised meat than any other restaurant. BurritoJoint is one of the first chains of fast casual dining establishments. From 1998 to 2006, BurgerHaven Corp owned a majority interest in BurritoJoint, but fully divested its interest in 2006.
BurritoJoint currently has more than 1000 locations, with restaurants in 38 states, the District of Columbia, Ontario, Canada, and London, England. Its net income in 2009 was US$126 million, and has a staff of 25,000 employees.
BurritoJoint has had 23% average sales growth over the years 2007, 2008 and 2009.
Background from Wikepedia. Names were changed to protect the innocent.
Part 1: Financial Statement Analysis & Free Cash Flow Determinants
The goal is to compare BurritoJoint over time and to one of its comparable companies.
1. Use the Income Statement and Common-Size Income Statements to describe BurritoJoint’s operations in 2009 relative to 2008 and relative to BurgerHaven in 2009. Consider revenue and the relative level of expenses. Do you notice changes for BurritoJoint over time or differences between BurritoJoint and BurgerHaven? Describe whether or not the findings are consistent with what you may know about the companies. Use Profitability Ratios to address the relative of performance along the different levels of operations for each.
2. Use the Balance Sheets and Common-Size Balance Sheets to compare BurritoJoint’s asset mix in 2009 to its asset mix in 2008 and to BurgerHaven’s asset mix in 2009.
Note the portion of short-term assets (and specifically cash) on the common-size balance sheets. How much cash does BurritoJoint hold at the end of 2009 relative to 2008 and relative to BurgerHaven? What might explain the change in cash over time and the difference between the two companies?
Hint: Generally, if a mature firm (with a relatively high payout ratio) holds cash, it will have to support, or finance that level of additional assets (cash). From where, and what are the implications? Consider your analysis of the cash balance in this context.
3. Use the Balance Sheets and Common-Size Balance Sheets to compare BurritoJoint’s liability mix and debt-equity mix in 2009 to itself in 2008 and to BurgerHaven in 2009.
To simplify the analysis, assume that securities (bonds) issued by the firm are Long-Term Debt and capitalized lease obligations of the firm are recorded as “Other Long-Term Liabilities.”
4. Use the balance sheets and income statements to calculate Days’ Sales in Inventory for BurritoJoint in 2009 and 2008 and BurgerHaven in 2009. Use COGS. Compare the results. What does this say about the frequency of food deliveries and storage expenses?
Now assume that BurgerHaven chose the “correct” level of inventory relative to sales. Increased inventory hedges against unexpected sales volatility (to ensure there’s no shortage of burritos or burgers). If BurritoJoint increased its inventory to the same relative level as BurgerHaven (as measured by days’ sales in inventory) assume this would result in an increase in short-term debt in “Other Current Liabilities.” Calculate the increase in interest expense if the marginal short-term borrowing cost is 3.00%.
5. Use the balance sheets to calculate the Current, Cash and Quick Ratios for BurritoJoint in 2009 and 2008 and BurgerHaven in 2009. What is the difference between these ratios? What is excluded as the ratios change?
Compare the results. What do these ratios tell us about BurritoJoint’s ability to meet its debt in the short run compared to BurgerHaven?
6. Use the balance sheet and income statements to calculate Earnings per Share, EBITDA, the Price-to-Earnings Ratio, the Price-to-EBITDA Ratio, the Price-to-Sales Ratio and the Market-to-Book ratios for BurritoJoint in 2009 and 2008 and BurgerHaven in 2009.
Describe the differences between these valuation ratios. What’s being removed as you move from one price-numerator ratio to the next?
Compare these relative valuation measures across time and companies. How is the market valuing BurritoJoint in 2009 compared to 2008 and to BurgerHaven in 2009? Which company does the market expect to grow more?
7. Use the balance sheet and income statements to calculate ROE, EM, ROA, AT and PM for BurritoJoint in 2009 and 2008 and BugerHaven in 2009.
These are the components of the DuPont Identity and are used to decompose profitability.
Compare BurritoJoint in 2009 to 2008. Did profitability increase or decrease? To what can the change be attributed?
Compare BurritoJoint to BurgerHaven in 2009. Which had the greater profitability? To what can the difference be attributed? What are the implications of the difference? What recommendations might be made to BurritoJoint’s operations management in order to increase profitability?
It is noted that you should find BurgerHaven is better at controlling expenses. Examine the income statements to determine which expenses are driving this result. Are your recommendations consistent with the BurritoJoint’s mission?
8. Calculate the current Plowback Ratio, the Internal Growth Rate and Sustainable Growth Rate for BurritoJoint. Briefly define each growth rate. What is the effect on the D/E ratio if the firm grows at the Internal Growth Rate? What is the effect on the D/E ratio if the firm grows at the Sustainable Growth Rate?
9. Calculate Net Operating Profit After-Tax, short-term and long-term operating capital requirements, and return on invested capital for BurritoJoint for both years and for BurgerHaven for 2009. Determine the net capital spending and free cash flow for BurritoJoint for 2009. Calculate and disclose what the uses of free cash flow were for BurritoJoint in 2009. Identify why the uses of free cash flow don’t equal the free cash flows previously calculated?
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