Assignment: Balance Sheet and Basic Industries

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Harvard Business School

9-197-010
Rev. May 30, 1997

First Investments, Inc.: Analysis of Financial Statements
In March 1995, Fred Aldrich, a summer trainee with the First Investments, Inc., was called into the office of the head of investment analysis section of the trust department. The following conversation took place: Fred, here are the 1994, 1993, and 1985 Basic Industries Company’s financials (Exhibit 1) and a 10-year summary (Exhibit 2 ). Our trust department has owned this stock since the early 1980s. As you know, our portfolio people place a lot of emphasis on the quality of a company’s earnings and the return on owners’ equity in making stock selections. Well, they are worried. The 1994 Basic Industries annual report shows a decline in the return on owners’ equity. Now, they want us to comment on the way that the company has achieved its return on equity over the last 10 years, starting with 1985. I would like you to prepare this analysis. I suggest you forget the strike years of 1989 and 1990. Also, concentrate on what happened in the 1993-1994 period. I hope the analysis will include a direct comparison of the quality of 1985 and 1994 returns on stockholders’ equity and the other key financial ratios for these two years. Finally, you should know that the company has not changed its accounting policies and practices materially over the last decade. The only changes have been due to new standards issued by the FASB, but these have not materially distorted the comparative data. Basic Industries is a diversified multinational corporation with major shares in various electrical related markets.

Questions
1. Complete the assignment given to Fred Aldrich.

Professor David F. Hawkins prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School.

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197-010

First Investments, Inc.: Analysis of Financial Statements

Exhibit 1 Basic Industries Company and Consolidated Affiliates: Statement of Current and Retained Earnings (as reported) for the Years 1994, 1993, and 1985 (in millions) 1994 Sales of products and services to customers Operating costs: Employee compensation, including benefits Materials, supplies, services, and other costs Depreciation Taxes, except those on income Increase in inventories during the year Operating margin Other income Interest and other financial charges Earnings before income taxes and minority interest Provision for income taxes Minority interest in earnings of consolidated affiliates Net earnings applicable to common stock Dividends declared Amount added to retained earnings Retained earnings at January 1 Retained earnings at December 31 $13,413.1 1993 $11,575.3 1985 $6,213.6

$ 5,332.0 6,966.7 376.2 123.0 (270.8) $12,418.1 $ 995.0 185.8 (180.1)

$ 4,709.7 5,690.5 334.0 113.5 (227.2) $10,620.5 $ 954.8 183.7 (126.9)

$ 2,440.8 3,063.4 188.4 51.6 (176.1) $5,568.1 $ 645.5 72.1 (27.4) $ 690.2 (352.2) 17.1 $ 355.1 (216.7) $ 138.4 1,246.0 $1,384.4

$ 1,000.7 (382.4) (10.2) $ $ 608.1 (291.2) 316.9 2,683.6

$ 1,011.6 (418.7) (7.8) $ $ 585.1 (272.9) 312.2 2,371.4

$ 3,000.5

$ 2,683.6

Basic Industries Company and Consolidated Affiliates: Statement of Financial Position (as reported) December 31, 1994, 1993, 1985 (in millions) 1994 Assets Cash Marketable securities Current receivables Inventories Current assets investments Plant and equipment Other assets Total assets $ 314.5 57.3 2,593.8 2,257.0 $5,222.6 1,004.8...
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