Case Study #1: Bigger Isn’t Always Better!

Andre Pires opened his automobile parts store, Quickfix Auto Parts, five years ago, in a mid-sized
city located in the mid-western region of the United States. Having worked for an automobile dealership,
first as a technician, and later as the parts department manager, for over 15 years, Andre had learned the
many nuances of the fiercely competitive automobile servicing business. He had developed many
contacts with dealers and service technicians, which came in really handy when establishing his own
retail store. Business had picked up significantly well over the years, and as a result, Andre had more
than doubled his store size by the third year of operations. The industry and local forecasts for the next
few years were very good and Andre was confident that his sales would keep growing at or above recent
levels.

However, Andre had used up most of his available funds in expanding the business and was well
aware that future growth would have to be funded with external sources of funds. What was worrying
Andre was the fact that over the past two years, the store’s net income figures had been negative, and his
cash flow situation had gotten pretty weak (See Tables 1 and 2). He figured that he had better take a
good look at his firm’s financial situation and improve it, if possible, before his suppliers found out. He
knew fully well that being shut out by suppliers would be disastrous!

Andre’s knowledge of finance and accounting, not unlike many businessmen’s, was very limited.
He had often entertained the thought of taking some financial management courses, but could never find
the time. One day, at his weekly bridge session, he happened to mention his problem to Tom Andrews,
his long-time friend and bridge partner. Tom had often given him good advice in the past and Andre was
desperate for a solution. “I’m no finance expert, Andre”, said Tom, “but you might want to contact the
finance department at our local university’s business school and see if you can hire and MBA student as
an intern. These students can often be very insightful, you know.”

That’s exactly what Andre did. Within a week he was able to recruit Juan Plexo, a second
semester MBA student, who had an undergraduate degree in Accountancy and was interested in
concentrating in Finance. When Juan started his internship, Andre explained exactly what his concerns
were. “I’m going to have to raise funds for future growth, and given my recent profit situation, the
prospects look pretty bleak. I can’t seem to put my finger on the exact cause. The bank’s commercial loan
is going to want some pretty convincing arguments as to why they should grant me the loan. I need to put
some concrete remedial measures in place, and was hoping that you can help sort things out, Juan,” said
Andre. “I think I may have bitten off more than I can currently chew.”
 Table 1

Quickfix Autoparts
Balance Sheets

ASSETS 2000 2001 2002 2003 2004

Cash and Marketable Securities $155,000 $309,099 $75,948 $28,826 $18,425

Accounts Receivable 10,000 12,000 20,000 77,653 90,078
Inventory 250,000 270,000 500,000 520,000 560,000

Current Assets $415,000 $591,099 $595,948 $626,480 $668,503

Land, Buildings, Plant, and Equipment $250,000 $250,000 $500,000 $500,000 $500,000
Accumulated Depreciation (25,000) (50,000) (100,000) (150,000) (200,000)
Net Fixed Assets $225,000 $200,000 $400,000 $350,000 $300,000

Total Assets $640,000 $791,099 $995,948 $976,480 $968,503

LIABILITIES AND EQUITIES
Short-term Bank Loans $50,000 $145,000 $140,000 $148,000 $148,000
Accounts Payable 10,000 10,506 19,998 15,995 16,795
Accruals 5,000 5,100 7,331 9,301 11,626

Current Liabilities $65,000 $160,606 $167,329 $173,296 $176,421

Long-term Bank Loans $63,366 $98,000 $196,000 $190,000 $183,000

Mortgage 175,000 173,000 271,000 268,000 264,000
Long-term debt $238,366 $271,000 $467,000 $458,000 $447,000

Total Liabilities $303,366 $431,606 $634,329 $631,296 $623,421

Common Stock (100,000 shares) $320,000 $320,000 $320,000 $320,000 $320,000

Retained Earnings 16,634 39,493 41,619 25,184 25,082

Total Equity $336,634 $359,493 $361,619 $345,184 $345,082

Total Liabilities and Equity $640,000 $791,099 $995,948 $976,480 $968,503

 Table 2

Quickfix Autoparts
Income Statements

2000 2001 2002 2003 2004

Net Sales $600,000 $655,000 $780,000 $873,600 $1,013,376
Cost of Goods Sold 480,000 537,100 655,200 742,560 861,370
Gross Profit $120,000 $117,900 $124,800 $131,040 $152,006

Admin and Selling Exp $30,000 $15,345 $16,881 $43,680 $40,535

Depreciation 25,000 25,000 50,000 50,000 50,000
Miscellanous Expenses 2,027 3,557 5,725 17,472 15,201
Total Operating Expenses $57,027 $43,902 $72,606 $111,152 $105,736
EBIT $62,973 $73,998 $52,194 $19,888 $46,270
Interest on ST Loans 15,000 15,950 14,000 13,320 13,320
Interest on LT Loans 8,000 7,840 15,680 15,200 14,640
Interest on Mortgage 12,250 12,110 18,970 18,760 18,480
Total Interest $35,250 $35,900 $48,650 $47,280 $46,440
Before-tax earnings $27,723 $38,098 $3,544 ($27,392) ($169)
Taxes 11,089 15,239 1,418 (10,957) (68)
Net Income $16,634 $22,859 $2,126 ($16,435) ($102)
Dividends on Stock 0 0 0 0 0
Addition to Retained Earnings $16,634 $22,859 $2,126 $16,435 $102
EPS (100,000 shares) $0.17 $0.23 $0.02 ($0.16) ($0.00)
Questions:

1. How does Quickfix’s average compound growth rate in sales compare with its earnings growth rate
over the past five years?

2. Which statements should Juan refer to and which ones should he construct so as to develop a fair
assessment of the firm’s financial condition? Explain why?

3. What calculations should Juan do in order to get a good grasp of what is going on with Quickfix’s
performance?

4. Juan knows that he should compare Quickfix’s condition with an appropriate benchmark. How should
he go about obtaining the necessary comparison data?

5. 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.

6. Comment on Quickfix’s liquidity, asset utilization, long-term solvency, and profitability ratios. What
arguments would have to be made to convince the bank that they should grant Quickfix the loan?

7. If you were the commercial loan officer and were approached by Andre for a short-term loan of
$25,000, what would your decision be? Why?

8. What recommendations should Juan make for improvement, if any?

9. What kinds of problems do you think Juan would have to cope with when conducting a comprehensive
financial statement analysis of Quickfix Auto Parts? What are the limitations of financial statement
analysis in general?