Quickfix’s Sales - Financial Analysis

1. How does Quickfix’s average compound growth rate in sales compare with its earnings growth rate over the past five years?

Quickfix’s sales have increased by an average compound rate of 14% per year over the past five years. In comparison, its net income has declined from over $16,600 in 2000, to a loss of $102 in 2004.

Quickfix’s average compound growth rate in sales over the past five years (2000-2004) is at 14%. However, the net income has declined drastically from 2000 to 2004 from $16,634 to $(102), respectively; with the change in net income being $(164.08). After comparing the figures against each other and noting how the company was continuing to grow at 14% but the net income was decreasing, I decided to look into what might be causing the decrease. Considering the net income is derived from the total revenue minus the total expenses I decided to look at these two factors. The revenue (sales) has continued to increase steadily from year to year, however, operating expenses and Selling and Administrative expenses have increased dramatically. Perhaps Quickfix should look into selling additional shares to the public to help gain more equity and cash to reinvest and cover expenses.

2. Which statements should Juan refer to and which one’s should he construct so as to develop a fair assessment of the firm’s financial condition? Explain why?

Juan should refer to the income statement and the balance sheet over the past 3-5 year period. In addition, he should prepare a cash flow statement, common size income statement and common size balance sheet. The accounting statements provide the raw data from which the other statements can be prepared. The cash flow statement helps determine where the cash came from and where it was spent during a year. The common size statements provide useful information regarding the relative trends of the various assets, liabilities, revenue sources, and expense items. They also help the analyst make meaningful comparisons between firms of varying sizes.

3. What calculations should Juan do in order to get a good grasp of what is going on with Quickfix’s performance?

Juan should calculate the various liquidity, leverage, profitability, activity, and coverage ratios for at least a three-year period. In addition, a Du Pont analysis of the return on equity will help determine what has affected the profitability of the company.

4. Juan knows that he should compare Quickfix’s condition with an appropriate benchmark. How should he go about obtaining the necessary comparison data?

Based on Quickfix’s industry classification code, Juan should collect industry averages of the key financial ratios. Some useful sources for industry ratios include: Value Line, Moody’s, Standard & Poor, and Dun & Bradstreet. In addition to the industry average,