JOSE RIZAL UNIVERSITY

Financial Analysis of Furniture Brands Company For the Years Ended December 31, 1999 And December 31, 2000

Submitted by Bandrang, Fatmah Aysha A. Caquilala, Catherine B. Dinio, Kimberly M. Diones, Meldy D. Tome, Maricel M.

Submitted to Dr. Mienrado M. Martinez

Table of Contents i. ii. iii. iv. Furniture Brands Balance Sheet Income Statement Statement of Shareholders Equity Financial Ratio Analysis of Furniture Brands  Liquidity  Asset Management  Financial Leverage Management  Profitability  Market-based Summary of Ratios for Furniture Brands Trend Analysis of Financial Ratios for Furniture Brands Summary of Financial Ratio Analysis

v. vi. vii.

1. Liquidity Ratios 1.1. Current Ratio= Current Assets Current Liabilities

Findings: Using data from Furniture Brands balance sheet statement, the current ratio is determined as: P691.581 is 4.83 times P143.118 Conclusion: Furniture Brands therefore has P4.83 in current assets for every P1 of current liabilities. Furniture Brands current ratio appears to be well above the industry average and hence less risky. The ratio is interpreted to mean that to satisfy the claims of shortterm creditors exclusively from existing current assets. 1.2. Quick Ratio= Cash + Marketable Securities + Accounts Receivable Current Liabilities

Findings: Referring to the figures of Furniture Brands balance sheet, the firms quick ratio at year-end 2000 is calculated as: P14.606+P351.804 is 2.56 times P143.118 Conclusion: The industry average is 1.75 times. Consistent with the current ratio, Furniture Brands quick ratio is above the industry average and appears to be less risky. Recommendations (Liquidity Ratios): 2. Asset Management Ratios 2.1. Average Collection Period= Accounts Receivable Annual credit sales/365

Findings: Assuming all sales for Furniture Brands are for credit, the average collection period ratio at year-end 2000 can be calculated as P351.804/ (P2, 116.239/365 days)=P351.804/P5.798 per day = 60.7 days. Conclusion: The industry average for this ratio is 49.4 days. Furniture Brands ratio is well above the industry average. 2.2. Inventory Turnover Ratio= Cost of Sales Average Inventory

Findings: For Furniture Brands, the average inventory balance is: (P294.454 + P285.395)/2=P289.925. Dividing the cost of sales by this figure, P1,529.874/P289.925, gives an inventory turnover ratio of 5.28 times.

Conclusion: Thus compares with an average of 5.49 for the industry. The difference is probably not significant. It appears that the firm has a low inventory turnover ratio which indicates an excessive inventory balances, or that some of the inventory is slowly moving. 2.3. Fixed Asset Turnover Ratio= Sales Net fixed assets

Findings: Furniture Brands fixed asset turnover ratio is P2,116.239/P303.235=6.98 times. Conclusion: Fixed Asset Turnover Ratio is slighlt above the industry average of 6.3 times. 2.4 Total Asset Turnover Ratio= Sales Total Assets

Findings: Furniture Brands total asset turnover ratio is P2,116.239/P1,304.838=1.62 times. Conclusion: Therefore, it is almost identical to the industry average of 1.63. Recommendations (Asset Management Ratios): 3. Financial Leverage Management Ratios 3.1. Debt Ratio= Total Debt Total Assets

Findings: Debt ratios are stated in terms of percentages. Furniture Brands debt ratio as of year-end 2000 is (P143.118 + P462.000 + P115.815) /P1,304.838=P720.933/P1,304.838=0.55251, or about 55percent. The numerator is the sum of all the current liabilities, long-term debt, and other long-term liabilities. The ratio is interpreted to mean the Furniture Brands creditors are financing 55 percent of the firms total assets. Conclusion: Furniture Brands debt ratio is considerably greater than the 32 percent industry average. The high leverage ratio also means that the shareholders of Furniture Brands may be subject to significantly greater bankruptcy risk than other firms in the industry. 3.2. Debt-to-Equity Ratio= Total Debt Total Equity

Findings: This ratio is also stated as a percentage. Furniture Brands debt-to-equity ratio at year-end 2000 is P720.933/P583.905 = 1.235, or 123.5 percent. Conclusion:

The industry average is 48 percent. In other words, the average firm in the industry raised approximately P0.48 in liabilities for each peso of equity in the firm. In contrast, Furniture Brands uses P1.24 of liabilities for every dollar of equity financing. This shows that Furniture Brands has been following a very aggressive financing policy. 3.3. Times Interest Earned Ratio= Earnings before interest and taxes (EBIT) Interest charges

Findings: From Furniture Brands Income Statement we note that the company incurred interest expense of P36.389 million in 2000. The firms operating earning or EBIT was P192.614 million. In other words, Furniture Brands covers annual interest payments5.29 times. Conclusion: This figure is significantly below the industry average of 31.8 times. 3.4. Fixed-charge Coverage Ratio= (EBIT) + lease payments Interest + lease payments + preferred Dividends before tax + before tax sinking fund

Findings: For Furniture Brands, the notes to the financial statements reveal that the firm incurred lease payments of P18.514 million in 2000 and that there were no sinking fund payments. From the balance sheet we know that the firm did not have any preferred shares outstanding, therefore no preferred dividends were paid out. Using these numbers, Furniture Brands fixed-charge coverage ratio is: (P192.614 + P18.514)/(P36.389 + P18.514) = P211.128/P54.903=3.8 times. Conclusion: We do not have a comparable industry average, as the necessary information was not available in the financial statements. Recommendations (Financial Leverage Management Ratios): 4. Profitability Ratios 4.1. Gross Profit Margin Ratio= Sales-Cost of Sales Sales

Findings: Furniture Brands gross profit margin ratio is (P2, 116.239-P1, 529.874) / P2, 116.239 = 27.7%, which is in line with the industry average of 27.2 percent. Conclusion: This percentage indicates that Furniture Brands cost of production is consistent with the industrys experience. 4.2. Findings: Net Profit Margin Ratio= Earnings after Tax (EAT) Sales

Furniture Brands net profit margin ratio is P105.901/P2,116.239=5.0%, which is below the industry average of 5.70 percent. Conclusion: Since the gross profit margin was nearly identical to the industry, the belowaverage net profit margin is indicative of above-average operating expenses and/or interest expenses.

4.3 Return on Investment (Total Assets) Ratio= Earnings after Tax (EAT) Total Assets Findings & conclusion: Furniture Brands return on investment ratio, P105.901/P1,304.838, is 8.1 percent, which is somewhat below the industry average of 9.4 percent and consistent with the below-average net profit margin for the firm. 4.4 Return on Shareholders Equity Ratio= Earnings after Tax (EAT) Stockholders equity Findings: Furniture Brands return on stockholders equity ratio is P105.901/P583.905 = 18.1%. Conclusion: The comparable industry average is 13.7 percent. Furniture Brands aboveaverage performance on return on stockholders equity but not on return on investments is attributable to the heavy debt loan taken on by the firm. The firm is liable to spread its net income over a smaller base of stockholders equity, thereby increasing the return on stockholders equity. Recommendations (Profitability Ratios): 5. Market-based Ratios 5.1. Price-to-Earnings Ratio= Market price per share Current earnings per share

Findings: Furniture Brands current (2000) earnings per share is P2.03 (net earnings of P105.901 million divided by the 52.277 million shares outstanding reported in the stockholders equity portion of the balance sheet). The firms year-end closing price was P21.0625 per share. Dividing the market price per share by the earnings per share yields Furniture Brands price-to-earnings ratio of 10.40 times (P21.06/P2.03). Conclusion: Furniture Brands price-to-earnings ratio is about the same as the industry average of 10.0 times. This suggests that the markets assessment of Furniture Brands stock is about the same as the industry average. 5.2. Market-to-Book Value or Price-to-book Value Market price per share

Book value per share Findings: The book value per share is equal to P11.17 (common stockholders P583.905 million divided by 52.277 million shares outstanding). With a market share of P21.0625, the market-to-book ratio for Furniture Brands (P21.06/P11.17). Conclusion: Furniture Brands price-to-book value ratio is considerably better industry average of 1.33. Recommendations (Market-based Ratios): Summary of Financial Ratio Analysis The firms liquidity ratios are ranked above average relative to industry measures. With respect to asset management ratios, the average collection period appears to be significantly worse than the industry average and the inventory turnover ratio is also below average. However, the fixed asset turnover ratio is better than the industry average, while the total asset turnover ratio is about the same as the industry average. The financial leverage of the firm is of concern, given that they appear to be significantly greater than the industry average. This is apparent from the much-higherthan-average debt and debt-to-equity ratios and the much-lower-than-average times interest earned ratio. The firm has been following a rather aggressive financing policy, which could limit the firms future financing flexibility, making it more difficult to obtain additional debt and reasonable rates. Additionally, the higher bankruptcy risk associated with high leverage ratios would be of concern to creditors and shareholders alike. The profitability measures are mixed, with a slightly above-average gross profit margin, a below-average net profit margin and return on investment, and an aboveaverage return on stockholders equity. The worse-than average net profit margin and return on investment are likely due to excessive financial leverage assumed by the firm. The higher-than average return on stockholders equity is also attributable to the high debt ratio, which permits the firm to spread the net income over a smaller shareholder equity base. The market-based ratios on balance are in line with the industry ratios. It is slightly above average for the price-to-earnings ratio and about average for the marketto-book ratio. These suggest that the market is not overly concerned about Furniture Brands high debt ratio---possibly because the market sees offsetting positive factors such as better liquidity and perhaps better future prospects. equity of price per is 1.89

than the