bigger is not always better

2432 words 10 pages
Financial Management

Case study-1
Bigger Isn’t Always Better!

Overview
Andre Pires, with over 15 years experience in the automobile industry opened a automobile parts store, in mid-western region of United States. Business had picked up significantly well over the years and Andre had more than doubled the store size by the third year of operations. Andre’s knowledge of finance and accounting was limited and he decided to recruit Juan Plexo, a second semester MBA student ,who had an undergraduate degree in Accountancy and was interested in concentrating in finance.
Facts
Andre had learned the nuances of the fiercely competitive auto mobile servicing business.
Andre had more than doubled the store size
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Q5. Besides comparison with the benchmark what other types of analyses could Juan perform to comprehensively analyze the firm’s condition? Perform the suggested analyses and comment on your findings.
Ans. The company can analyze the ratios of the organization. Using ratios, the relative profitability, growth or debt levels, can be measured with ease. A business ratio report, takes the hard work out of financial performance analysis. Different ratios signify different things. For example, a Current ratio of 1 is considered good. The type of industry in which the operation is conducted also matters. It is necessary that one is aware of these standard ratios so as to see the position of your performance.
Juan can prepare Common size income statement and balance sheet in order to understand the financial position of the company. This would assist Juan in better understanding of the company.

Common size income statement

2000
2001
2002
2003
2004
Net sales
100.0
100.0
100.0
100.0
100.0
Cost of goods sold
80.0
82.0
84.0
85.0
85.0
Gross profit
20.0
18.0
16.0
15.0
15.0
admin & selling expenses
5.0
2.3
2.2
5.0
4.0
depreciation
4.2
3.8
6.4
5.7
4.9
Misc. expenses
0.3
0.5
0.7
2.0
1.5
Total Operating expenses
9.5
6.7
9.3
12.7
10.4
EBIT
10.5
11.3
6.7
2.3
4.6
Interest on

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