This assignment addresses the following Module Outcomes:
Assess a firm’s solvency, asset management and profitability using common financial ratios. (CO1)
Evaluate the financial position of the firm using time and trend or peer-group analysis. (CO1, CO2)
Background
Callaway Golf Company was incorporated in 1982 with the purpose of designing, manufacturing and selling high quality golf clubs. The Company became a publicly traded corporation in 1992. Callaway Golf has evolved over time from a manufacturer of golf clubs to one of the leading manufacturers and distributors of golf equipment and accessories. Callaway designs its products to be technologically advanced and invests substantially in research and development each year. The Company’s golf products are designed for golfers of all skill levels including amateur and professional golfers. Callaway Golf generally sells its products to retailers, directly and through its wholly-owned subsidiaries, and to third-party distributors. It also licenses its trademarks and service marks in exchange for a royalty fee to third parties for use on golf related accessories, including golf apparel and footwear, golf gloves, prescription eyewear and practice aids.
The Company’s products are sold in the United States and in over 100 countries around the world. For purposes of this assignment, assume that you focus is Drive It Long, which is a close competitor to Callaway Golf. Drive It Long similarly sells golf clubs, golf balls and golf accessories. These products are recreational in nature and are therefore discretionary purchases for consumers. Both firms are affected by the fact that consumers are generally more willing to make discretionary purchases of golf products during favorable economic conditions and when consumers are feeling confident and prosperous.
Discretionary spending is also affected by factors including general business conditions, interest rates, consumer confidence in future economic conditions, and the availability of consumer credit. Purchases of these firms’ products may decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions. A significant or prolonged decline in general economic conditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending would have a negative impact on these firm’s results of operations, financial condition and cash flows.
This paper is an exercise designed to better acquaint students with the four main categories of ratio analysis. Financial ratios are a standardized means of comparing information presented in financial statements, in order to analyze the operations of a firm, and to compare operations against certain benchmarks that assist us in drawing conclusions about the firm’s performance. This exercise requires students to compute common financial ratios in the four areas in which these are most often applied to analyze firm performance.
This will strengthen the student’s ability to understand what aspects of a firm’s activities that a particular ratio characterizes, and where this information can be found in financial statements. The student will additionally be asked to draw conclusions regarding financial performance using computed ratios.
Assume that you are a Senior Financial Manager for Drive It Long Golf, Inc. A close competitor is Callaway Golf Co. (ELY). You are preparing to address the Board of Directors regarding the current financial picture of the firm, following the release of the firm’s Audited Financial Statements. Drive It Long Golf, Inc. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2016 was $58. Assume that this company’s growth rate is 9%. As Drive It Long’s Senior Financial Manager, you are assumed to be able to offer an authoritative interpretation of the firm’s recent performance.
Financial Ratios, Drive It Long Golf, Inc.
Short-term solvency ratios:
2015
2016
a. Current ratio
1.1
1.15
b. Quick ratio
0.65
0.68
c. Cash ratio
0.43
0.42
Asset utilization ratios:
Period
d. Total asset turnover
0.88
e. Inventory turnover
8.93
f. Receivables turnover
23.09
Long-term solvency ratios:
2015
2016
g. Total debt ratio
0.37
0.38
h. Debt–equity ratio
0.58
0.6
i. Equity multiplier
1.58
1.6
Period
j. Times interest earned ratio
5.73
k. Cash coverage ratio
7.99
Profitability ratios:
Period
l. Profit margin
11.94%
m. Return on assets
10.53%
n. Return on equity
16.85%
Table 1. Financial Ratios, Drive It Long Golf, Inc.
Drive It Long, Inc.
Statement of Cash Flows for 2016
Cash, beginning of the year
$26,450
Operating activities
Net income
$50,376
Plus:
Depreciation
$37,053
Increase in accounts payable
4,883
Increase in other current liabilities
5,161
Less:
Increase in accounts receivable
($4,589)
Increase in inventory
(4,655)
Net cash from operating activities
$88,229
Investment activities
Fixed asset acquisition
($78,233)
Net cash from investment activities
($78,233)
Financing activities
Increase in notes payable
($2,340)
Dividends paid
(20,000)
Increase in long-term debt
15,000
Net cash from financing activities
($7,340)
Net increase in cash
$2,656
Cash, end of year
$29,106
Table 2. Statement of Cash Flows, Drive It Long, Inc.
Drive It Long, Inc.
2014 and 2015 Balance Sheets
2014
2015
2014
2015
Current assets
Current Liabilities
Cash
$26,450
$29,106
Accounts payable
$30,602
$35,485
Accounts receivable
13,693
18,282
Notes payable
15,840
13,500
Inventory
27,931
32,586
Other
15,280
20,441
Total
$68,074
$79,974
Total
$61,722
$69,426
Long-term debt
$95,000
$110,000
Owner’s equity
Common stock & paid-in surplus
$ 45,000
$45,000
Fixed assets
Accumulated retained earnings
223,517
253,893
Net plant & equipment
$357,165
$398,345
Total
$268,517
$298,893
Total assets
$425,239
$478,319
Total liabilities & owners’ equity
$425,239
$478,319
Table 3. Balance Sheets, Drive It Long Golf, Inc.
Drive It Long, Inc.
2015 Income Statement
Sales
$422,045
Cost of Goods Sold
$291,090
Depreciation
37,053
Earnings Before Interest and Taxes
$93,902
Interest Paid
$16,400
Taxable Income
77,502
Taxes (35%)
27,126
Net Income
$50,376
Dividends
$20,000
Retained Earnings
30,376
Table 4. Income Statement, Drive It Long Golf, Inc.
1. Analyze the financial performance of Drive It Long Golf, Inc. using the following tools:
a. time and trend analysis
b. peer-group analysis
c. two or more ratios financial ratios (introduced in Module Two’s assigned readings) in each area that will allow you to evaluate the following four aspects of performance:
I. Short-term solvency
II. Asset Utilization
III. Long-term solvency
IV. Profitability
2. Eval’uate the firm’s financial position using the firm’s DuPont Identity, considering:
a. operating ciency (as measured by profit margin),
b. asset use efficiency (as measured by total asset turnover), and
c. financial leverage (as measured by the equity multiplier).
3. Determine PEG ratio.
Construct Drive It Long’s PEG ratio, and
Evaluate this PEG ratio.
Your paper should be 4–6 pages long with a minimum of 2 references in a double-spaced document using 12 pt.
Book of Reference:
Fundamentals of Corporate Finance, Twelfth Edition Published by McGraw-Hill Education, 2 Penn Plaza, New York, 10121 Copyright 2019
