You are evaluating two companies in the forest industry. Both companies are public, and are integrated companies that own or lease timber properties, harvest trees, and make building supplies and paper products. This industry is very volatile. Their profiles, from published annual reports:
A North American–based producer of building materials including oriented strand board, medium-density fibreboard, hardwood plywood, lumber, I-joists, specialty papers, and pulp. The company is also the United Kingdom’s largest producer of wood-based panels, including particleboard and value-added products. The company employs over 2,600 people in North America and 1,000 in the United Kingdom.
The company is a leading Canadian integrated forest products company. The company employs approximately 6,800 people. The company has extensive woodlands operations and manufacturing facilities in British Columbia and Alberta, and a lumber remanufacturing plant in the United States. The company is a major producer and supplier of lumber and bleached kraft pulp. It also produces semi-bleached and unbleached kraft pulp, bleached and unbleached kraft paper, plywood, remanufactured lumber products, hardboard panelling and a range of specialized wood products, including baled fibre and fibremat. Products are sold in global markets.
You have limited industry norms, which relate to years prior to those presented for the two companies; industry norms are difficult to establish for the current years.
Select set of ratios for the forest industry in Canada
20X3 20X2 20X1
Debt to equity (%) 81 68 72
Operating profit margin 15.8 13.4 7.7 Return on assets 7.6 6 0.7
Return on equity 17.4 12.5 1.5 Current ratio 2.1 2.1 1.9
Summarized financial data for each company is shown in Exhibit 1. A standard financial statement analysis form is included.
The companies both have unqualified audit reports and have similar accounting policies except for the following:
1. Company #1 uses FIFO while Company #2 uses weighted-average cost for inventory.
2. Both companies use a combination of straight-line and units-of-production amortization methods for capital assets, but Company #1 uses useful lives that are approximately 25% longer than those used by Company #2.
Provide an analysis that compares Company #1 and Company #2 from the perspective of 1. a potential short-term creditor 2. a potential common stock investor
Assume a tax rate of 40% for both companies. There are work sheets at the end to help with your analysis. 1324
Please refer to the Case instruction sheet on FOL
COMPARATIVE FINANCIAL STATEMENTS
Company 1 Company 2
20X6 20X5 20X6 20X5
Cash and cash equivalents $ 20 $ 67 $ 208 $ 17 Temporary investments – – 24 – Accounts receivable 267 242 304 321 Inventory 492 500 312 353 Future income tax 23 30 13 28 Total current assets 802 839 861 719
Property, plant, & equipment 1,984 1,903 1,469 1,518 Other assets 27 22 230 190 Total assets $2,813...