Enterpreneurial Finance - Honest Tea #1

Honest Tea #1

1). Calculate the liquidity, asset management, debt management, and profitability ratios for Honest Tea for 1998 and 1999. What are the strengths and weakness? What are the trends?

 

Liquidity Ratio

 

Current Ratio =Average Current Assets / Average Current Liabilities

 

Quick Ratio =  (Average Current Assets – Average Inventory) / Average Current Liabilities

 

NWC-to-Total Assets Ratio = (Average Current Assets – Average Current Liabilities) / Average Total Asset

 

Ratio/Year	1998	1999	% Change
Current	193,121/1518 = 127.22	(193,121 + 959,915)/2 / (1518 + 217630)/2 =1153036/219148 =5.26	- 95.86%
Quick	(193,121 – 98,477)/1518 =62.34	((193,121 + 959,915)/2 – (98477 + 297571)/2)/ (1518 + 217630)/2 = (576518 – 198024)/109574 =3.45	- 94.47 %
NWC-to-Total Assets	(193121 – 1518)/217153 =0.88	((193,121 + 959,915)/2 –  (1518 + 217630)/2) / (217153 + 1131601)/2 = (576518 – 109574)/674377 =0.69	- 21.36 %

 

Asset Management

 

Inventory-to-sale Conversion Ratio = Average Inventories / (Cost of Goods sold/365)

Sale-to-Cash Conversion period = Average Receivables / (Net sales /365)

Purchase-to-payment Period = (Average Payable + Average Accrued Liabilities) / (Cost of Goods sold/365)

Cash Conversion Cycle = Inventory-to-sale Conversion period + Sales-to-cash Conversion Period - Purchase-to-payment Conversion period

 

Ratio/Year	1998	1999	Impact (Days)
Inventory to Sale	98477/(222414/365) =161.6	(98477 + 297571)/2 / (222414 + 745321)/2/365 =97	- 64.62
Sale to Cash	61,066/  (266,106/365 =83.76	( (61,066 + 176,039)/2)/( (1,080,855/365)) = 40	- 43.73
Purchase to payment	1,518/ (222,414/365) =2.49	( (1,518 + 217,630)/2)/( $ (745,321/365)) = 53.7	- 51.17
Cash conversion cycle	161.59 + 83.76 – 2.49 = 242.86	96.97 + 40.03 – 53.66 = 83.34	- 159.52

 

Debt Management Ratio

1.       Total-debt-to-Total-Assets Ratio = Average Total Debt / Average Total Assets

2.       Equity Multiplier = Average Total Assets / Average Owner’s Equity

3.       Current-Liabilities-to-Total-Debt Ratio = Average Current Liabilities / Average Total Debt

4.       Interest Coverage = EBITDA / Interest

 

Ratio/Year	1998	1999	Impact (Days)
Total-debt-to-Total-Assets	1,518 / $ 217,153 = 0.00699	((1,518 + 219,472)/2)/((217,153 + 1,131,601)/2) = 0.1638 = 16.38 %	Increase
Equity Multiplier	217,153 / $ 215,635 = 1.007	((217,153+1,131,601)/2)/((215,635 + 912,129)/2) = 1.196 times	Increase
Current-Liabilities-to-Total-Debt	1,518 / $ 1,518 = 1	( (1,518 + 217,630)/2)/(  (1,518 + 219,472)/2) = 0.9916	Decrease
Interest Coverage	NA (Interest is zero)	-  869,336 / 1,107 = - 785.3	NA

 

 

Profitability Ratio

5.       Gross Profit Margin = (Net Sales – CGS) / Net sales

6.       Operating Profit Margin = EBIT / Net Sales

7.       Net profit Margin = Net Profit / Net Sales

8.       Sales-to-Total-Assets Ratio = Net Sales / Average Total Assets

9.       Operating Return on Assets = EBIT / Average Total Assets

10.   ROA = Net Profit / Average Total Assets

11.   ROE = Net Profit Margin C Asset Turnover C Equity Multiplier

 

Ratio/Year	1998	1999
Gross Profit Margin	(266,106 – 222,414) / $ 266,106 = 0.164	(1,080,855 – 745,321) / $ 1,080,855 = 0.31
Operating Profit Margin	365,521 / $ 266,106 = - 1.373	= - $ 881,252 / $ 1,080,855 = 0.815
Net profit Margin	365,521 / $ 266,106 = 1.373	- $ 882,359 / $ 1,080,855 = 0.816
Sales-to-Total-Assets Ratio	266,106 / $ 217,154 = 1.23	1,080,855 /  (217,154 + 1,131,599) /2 = 1.602
Operating Return on Assets	- $ 365,521 / $ 217,154 =  - 1.68	-  881,252 /  (217,154 + 1,131,599) /2 = -1.306
ROA	- $ 365,521  / $ 217,154 = - 1.68	-  882,359 /  (217,154 + 1,131,599) /2 = -1.308
ROE	1.373 * 1.23 *.1.007	0.816 * 1.602 *.196 = 1.563

 

 

 

 

 

2). Construct common size income statements and balance sheets for Honest Tea for 1998 and 1999. What are the “big ticket” accounts? What does your analysis tell you about strength and weakness of trends?

 

Balance sheet			Common Size Balance Sheet
	1998	1999	1998	1999
Assets
Current Asset
Cash	$33,578.00	$450,173.00	15.46	39.78
AR	$61,066.00	$176,039.00	28.12	15.56
Inventory	$98,477.00	$297,571.00	45.35	26.30
Prepaid expense & other CA	$0.00	$36,131.00	0.00	3.19
Total CA	$193,121.00	$959,914.00	88.93	84.83
Investment	$0.00	-$38,207.00	0.00	-3.38
Notes receivable	$0.00	$57,742.00	0.00	5.10
Depreciation	$22,644.00	$69,022.00	10.43	6.10
Amoritization	$1,389.00	$25,033.00	0.64	2.21
Deposits	$0.00	$58,095.00	0.00	5.13
Total Assets	$217,154.00	$1,131,599.00	100.00	100.00
Liabilities
Credit card and AP	$1,518.00	$217,630.00	0.70	19.23
Total CL	$1,518.00	$217,630.00	0.70	19.23
Longterm	$0.00	$1,843.00	0.00	0.16
Total Liabilities	$1,518.00	$219,473.00	0.70	19.39
Equity
125 share	$1.00	$0.00	0.00	0.00
174 share	$0.00	$2.00	0.00	0.00
Additional paid-in-capital	$581,153.00	$2,366,662.00	267.62	209.14
Loss from investment	0.00	-206657.00	0.00	-18.26
RE	-365519.00	-1247879.00	-168.32	-110.28
Total Equity	$215,635.00	$912,128.00	99.30	80.61
Total Liability + Equity	$217,153.00	$1,131,601.00	100.00	100.00

 

 

Income Statement			Common Size Income Statement
Revenue
Sales	$273,913	$1,229,882
Sales Discount	-$7,807	-$149,027
Net sale (Sale - sale discount)	$266,106	$1,080,855	100.00	100.00
Other income	$5,862	$15,167	2.20	1.40
Total revenue	$271,968	$1,096,022
CGS	$222,414	$745,321	83.58	68.96
Gross profit%	$49,554	$350,701	18.62	0.00
Expenses
Broker commission	$0	$38,787	0.00	3.59
Consultants	$81,464	$43,659	30.61	4.04
General & Admin	$29,970	$103,242	11.26	9.55
Payroll Taxes	$13,191	$41,559	4.96	3.85
Professional fees	$35,467	$24,307	13.33	2.25
R&D	$22,254	$80,957	8.36	7.49
Salaries	$125,976	$390,876	47.34	36.16
Sales & Marketing	$87,016	$399,649	32.70	36.98
Travel	$15,647	$65,865	5.88	6.09
Total OE	$410,985	$1,188,901	154.44	110.00
Bad debt expense	$0	$31,136	0.00	2.88
Depreciation	$4,090	$11,916	1.54	1.10
Interest Expense	$0	$1,107	0.00	0.10
Total Expense	$415,075	$1,233,060	155.98	114.08
Net income (Loss)	-$365,521	-$882,359	-$137	-$82

 

3). Do a Venture Opportunity Screener for Honest Tea. Is this a good business?

 

Venture Opportunity Screening Guide (VOS)

	Potential Attractiveness
Factor Categories	High	Average	Low
Industry Market
Market Size potential		2
Venture Growth size		2
Market Share		2
Entry Barriers		2
Pricing/Profitability
Gross Margin		2
After-tax Margin		2
Asset Intensity			1
Return on Assets			1
Financial/Harvest
Cash Flow Breakeven		2
Rate of return		2
IPO potential		2
Founder’s control	3
Management Team
Experience/Expertise		2
Functional Areas		2
Flexibility/Adaptability	3
Entrepreneurial focus	3
Total points by ranking	9	22	2
Overall total Points (OTP)		33
Average score (OTP/16)	33/16 = 2

 

The Average score of the VOS is 2.