Analysis of Peyton Enterprises’s Future Decisions

Analysis of Peyton Enterprises’s Future Decisions

By Group #6 - Qiyuan Yang, Chase Carnahan, Kexin Lian, Man Hou

Prepared for: Shuoyuan He ACCY 301 AE9

October 17, 2016

EXECUTIVE SUMMARY

Peyton Enterprises is a company engaged in the design and manufacture of equipment and component products used in the chemical industry. Most of its clients are engaged in the energy and life science sector. But due to drop in use of coal-fired power plants, which results in the down performing of the energy sector which the company has a 30% market share, the company’s sales revenue has been dropping since 2013. And in the first quarter of 2015, the company even suffered a net loss for the first time in a decade. The company also have difficulty in controlling cost, which also leads to its decline in performance.

The company has recently appointed a new CEO. She planned to use a more conservative accounting method which leads to a successful IPO. The conservative method including increase the percentage of uncollectible accounts receivable, use the double-declining depreciation method, delay the initiative of slowing the inventory purchasing.

Although the conservancy is favorable by investors and may have fewer questions on their financial statements in the future, but we think it’s not the right time for the company to go IPO. Because the declining financial performance may give potential investors the signal that the company revenue may continue declining and that the stock of Peyton does not have investment values. Thus, there are only few investors and money they raised cannot represent the real value of the company. The company should avoid write-downs because this can make the company’s asset accounts look better and attract more investors in the future IPO.

ANALYSIS OF PEYTON’S RECENT FINANCIAL PERFORMANCE

Peyton’s recent financial performance has been declining since 2014. And in the first quarter of 2015, the company incurred its first financial loss for nearly a decade. Sales growth has slowed considerably and the company was having difficulty controlling costs.

            If we assume the FY2015 financial performance will be the same as the first quarter of 2015, we can get the 2015 net sales 2,142,172 thousand by multiply 4. Thus, we found that the sales declined 13% in 2015 and 19% in 2014.

The Reason of Sales Decline: Peyton has a 30% market share as the supplier of choice to those producing coal-cleaning agents, but due to the drop in use of coal-fired power plants in the United States, the company’s sales suffered a lot.

When we analyzed the company’s financial ratios (Exhibit 1), we can see that the company’s gross margin, operating margin and net margin has dropped since 2013.  From FY2013 to FY2014, the drop was slight. But from FY2014 to the first quarter of 2015, the drop of operating margin and net margin was dramatic, which indicates a surge of Selling, General and Administrative expenses compared to the total sales. As we can see from the above table, the SG&A to Sales Ratio increased by nearly 5 percent. Another noteworthy account is net financing costs, which nearly tripled in 2013 and 2014 compared to the number in 2012.