D’Leon Incorporated is a regional snack foods production company that operates in North Florida. D’Leon specializes in high quality pecan and other nut products sold in the snack food market. In 2007, D’Leon Incorporated took on an expansion program to make their products available to customers nationwide. This expansion program put the small-scale local producer into competition with industry leaders like Frito Lays. D’Leon planned on gaining market share by offering a higher quality product than the competition. The expansion program required significant increases in plant capacity, additional sales offices, and implementing a costly customer awareness marketing campaign. By 2008, D’Leon’s financial status was suffering due to the expansion program’s higher than expected costs and lower than anticipated increase in sales.
This financial analysis report contains sections examining D’Leon’s financial statements, evaluating the expansion’s effects, projections for 2009, and recommendations for improvement. Financial statements and ratio analysis can be found in Tables 1-11 pages 16-20 in the appendix.
Section II of this report is a financial analysis on D’Leon’s expansion program. The report includes comparing D’Leon’s performance to that of other firms in the same industry and evaluating trends in the firm’s financial position over time. Managers, creditors, and investors, use ratio analysis for evaluating a certain company or investment’s performance. The comparison identifies the investment’s strengths, weaknesses, solvency, and growth potential.
The five major categories of ratios are: liquidity, asset management, debt management, profitability, and market value. These five ratios can be found in Tables 6-10 (pages 21-25) in the appendix.
A. Liquidity Ratios
Liquidity ratios measure the ability to pay current and long-term debt when due. Companies must maintain acceptable liquidity ratios to handle future and current business operations. The current ratio and quick ratio can be found on Table 6 (page 21) in the appendix.
The current ratio, current assets divided by current liabilities, measures the ability to pay current liabilities as they come due. A strong current ratio is generally considered to be around 1. The industry average current ratio is 2.7. D’Leon’s 2007 current ratio was just below average at 2.3. Due to the expansion program 2008’s current ratio decreased well below the industry average to 1.2. In 2009 the current ratio is projected to recover to 2007’s ratio of 2.3.
D’Leon’s 2007 quick ratio, current assets minus inventories divided by current liabilities, is .8. Inventory is subtracted from current assets because inventory can be difficult for some companies to liquidate quickly. The industry averages a quick ratio of 1.0. The quick ratio for 2008 decreased by 50% to .4. In 2009 the quick ratio is expected to increase back to .8, which is still below the industry average. D’Leon is currently in a poor liquidity position, risking future business operations. If D’Leon can collect its accounts receivable, it should be able to pay off its current liabilities without liquidating its inventory. If D’Leon can recover its quick ratio back to .8, D’Leon will be able to carry on business operations without additional funding.
B. Asset Management Ratios
Asset management ratios measure how effective the firm is managing its assets. Asset management ratios, seen in Table 7 (page 22), measure a firm’s inventory turnover, day’s sales outstanding, fixed assets turnover, and total assets turnover.
The inventory turnover ratio is sales divided by inventory. D’Leon’s inventory turnover rate for 2007 was 4.8. By 2008 the ratios decreased to 4.7, then down to 4.1 in 2009. The industry averages a 6.1 turnover ratio. D’Leon’s substandard inventory turnover rate indicates D’Leon is purchasing too much...