Case Study 1 - Moncton Security & Sprinkler

docx

School

New Brunswick Community College, Fredericton *

*We aren’t endorsed by this school

Course

101

Subject

Business

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by wingsNDGRILL

Chelsi Ann Lutao Michelle Hernan Business Administration - Accounting Case Study # 1 - "Moncton Security & Sprinkler Ltd." Congratulations! You are now the manager of the credit department of Maritime Super Sprinkler Manufacturing Inc. Your hard-working sales team has presented you with a substantial new order from a new customer, Moncton Security & Sprinkler Industries. For over a decade, Moncton Security & Sprinkler has been selling, installing, and maintaining security and water sprinkler systems for its customers. You sales team fully understands what you need to grant approval in a case like this so they have presented you with the following financial statements and industry ratios (from Dunn & Bradstreet). They note that Moncton Security & Sprinkler's sales have increased dramatically over the last two years since a new VP of Sales came on board and instituted aggressive sales targets and a more aggressive approach to sales. Obviously, the VP of Sales (and her team) are eager for you to grant short term (trade) credit (in the amount of hundreds of thousands of dollars) to Moncton Security & Sprinkler Industries to support this sale. Your task is to complete analysis to ensure an adequate degree due diligence and risk analysis is conducted while supporting the business by enabling sales of credit. Your first step is to conduct a ratio analysis noting all positive factors as well as any ratios that are cause for concern or require a further explanation. ➢ See the three (3) questions you must answer at the end of this document.

Note: Earnings available to common shareholders = Net Income Operating profit 66,550

Selected Industry ratios Profit margin ................................................. 5.8% Return on assets (investment) ....................... 8.1% Return on equity ............................................ 20.3% Receivables turnover ...................................... 6.3 x Average collection period .............................. 58.3 days Inventory turnover .......................................... 4.3 x Capital asset turnover ..................................... 8.0 x Total asset turnover ........................................ 1.7 x Current ratio ................................................... 1.6 Quick ratio ...................................................... 1.1 Debt to total assets .......................................... 60% 202,000 Bank loan

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Times interest earned ...................................... 4.3 x a). If you were being asked to determine whether your company should grant short-term credit to Moncton Security & Sprinkler Industries, which ratios would you consider as most important?  Receivables Turnover  Average collection Period  Invetory Turnover  Current Ratio  Quick Ratio  Debt to total assets  Times Interest earned b). Based on these ratios, would you grant short-term (trade) credit to Moncton Security & Sprinkler? No. c.) Why or why not? By analyzing and looking at just these three time periods, I wouldn't approve credit for Wizard Industries. If I were to reconsider, I would need to examine their financial statements from previous times to analyze further. However, based on the information from these three periods alone, I wouldn't approve credit. The profits in 2015 and 2013 were much lower than average, and although 2014 showed success with a high net income, there's inconsistency in their profits, posing a significant risk. Their use of assets, though still below industry averages, is less concerning than the profitability. An important issue is the average collection periods, which are 35 days longer than the industry average. Liquidity ratios are in line with industry averages. The debt utilization in 2015 is a major concern, with a 91% debt-to-total assets ratio and a times interest earned of 1x. This poor handling of debt raises a red flag and if maybe there's improvement after 2015, there are still many unanswered questions in this area.

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