Sift's Net Sales

Question 6:

Base on the data in case Exhibit 9

• Sift’s net sales grew briskly from $220,904 in 2008 to a projected $961,118 in 2010—a compounded annual growth rate of 109%.
• Sift’s EBIT grew from $7,169 in 2008 to $163,188 projected for 2010—a compounded annual growth rate of 377%.
• Sift’s net income increased from $6,174 in 2008 to $137,079 projected for 2010—a compounded annual growth rate of 371%.

The company’s cost of goods sold as a percentage of net sales has increased from 26.3% in 2008 to 63.2% in 2010. However, this increase is caused by a change in accounting practices which reallocated labor cost from operating expenses to cost of goods sold.

Gross profit margin

Sales Revenues—COGS/ Sales Revenues

In 2008: 220,904.46-58,067.35/220,904.46 = .737

In 2009: 508,357.99-137,036.98/508,357.99 = .730

In 2010: 961,118.23-607,085.68/961,118.23 = .368

Gross profit margin shows the percentage of revenues available to cover operating expenses and yield a profit. The company’s gross profit margin has declined from 73.7% in 2008 to 36.8% in 2010. Again, this decline is related to the change in accounting policy.

Current ratio

Current Assets/ Current Liabilities

In 2008: 29,092/5,760 = 5.15

In 2009: 42,932/13,088 = 3.28

In 2010: 64,328/45,928 = 1.40

Current ratio shows a firm’s ability t0 pay current liabilities using assets that can be converted to cash in the near term.The current ratio has deteriorated from a strong 5.2 to an acceptable 1.4. However, the owners of the company comment in the case introduction that the company has inadequate cash on hand to pay income taxes payable.

Total Debt to assets ratio

Total Debt/ Total Assets

In 2008: 5,760/ 59,609 = .090

In 2009: 24,742/136,365 = .181

In 2010: 134,050/279,669 = .479

While Sift is only moderately leverage in 2010, with a debt-to-assets ratio of 31.5% and a debt-to-equity ratio of 60.5%, the company had no long-term debt in 2008. In addition, the owners mention in the introduction of the case that Sift’s line of credit has been exhausted. In addition, the company is pursuing a $340,000 SBA loan which, if approved, will substantially change the company’s degree of leverage.