Tuesday, August 12, 2014

Fake Company Analysis

To our shareholders:
As you know, calendar year 2008 was a challenging year for many industries, unless you were selling mattresses to hide your currency reserves under, doomsday shelters, guns, water purifiers, or oddly enough, toaster ovens. Concordia Corporation Ltd is in none of those sectors; instead, as you of course know, we are a purveyor of fine artisanal carbonated beverages. Our main competitors are the mass-market holdings of the Coca-Cola Company, PepsiCo, and the Doctor Pepper Snapple Group. We exist in a specialty niche with the likes of Jones Soda Corp.
In spite of the headwinds the larger economy poses, I feel that the company is poised for growth unmatched in the company’s history. This is a time of fear, and as Warren Buffet says, the time to be greedy is when everyone else if fearful. That is why in the current fiscal year we are making a huge marketing push behind our flagship brand, Blamm!, the low-calorie high energy thirst refresher that is known from Hollywood Boulevard to Wall Street and all the Main Streets in between.
Though we look to the future, this is a time for reflection on the highs and lows of the previous year. In the following sections, I will assess the profitability; performance and efficiency; resource use; liquidly; the financial stability and solvency of Concordia Corporation Ltd. I will synthesize the all of these into a general comment and conclusions based on the totality of these sections.
I: Profitability, Performance, and Resource Use for the Stockholder
When looking at the profitability of a company, it is too easy to look at the top line number. So, when you look at the gross sales from 2009 on the income statement (Fig 2), and you see that we brought in less in fiscal 2009 than we did ($68800 in 2009 compared to $73500 in 2008). However, we were able to almost double our net income by taking an extraordinary after tax income of 4800 where we had an after tax loss the previous fiscal year of $1000. This boosted our net income to $8860 for the fiscal year.
There are other ways to look at our profit, which show the strength of the company. For example, our gross margin percentage, which is a comparison of the net sales and the profit after the cost of goods sold has increased over Fiscal 2008 and even compared to Fiscal 2007. We have been able to do so mainly be decreasing the cost of goods sold by negotiation of favorable terms with our bottlers, and intelligent speculation on the corn futures market. Corn sugar makes up 60% of the overall materials cost of Blamm! and a similar amount of our other branded products. These two actions have allowed Concordia to see a 12% drop in materials cost in the last two years (fig 5) and growing our gross margin ratio to 44.56 %, in line with industry averages.
Unfortunately, the gross margin is not all profit, and we cannot just return all that money to shareholders as dividends nor can we invest it to grow the company. All the expenses have to come out of that margin: selling, administrative, depreciation, interest, and taxes have to be paid. The good news is that, as we spoke above, we were able to clear a profit in spite of the economy, and even have a greater profit margin than our competitors, clearing 12.87% of our gross sales as profit for the company and our shareholders. This compared to an industry average in 2009 of an 8.5% margin, so we beat out the industry by almost half again of their margin, in spite of the larger players ability to negotiate with suppliers (fig 12).
Likewise, with our net income, many of the other metrics of our profitability have increased in the past year compared to 2008, but it is necessary to point out that in terms of net income, 2008 was an anomaly, with net income lowered rather than raised with after-tax extraordinary charges. Perhaps can go even further back in time and compare the 2009 growth and growth potential with periods before the recession beginning. Green shoots already are sprouting that the recovery will be swift and painless, the financial crash of 2008 forgotten in memory like the Eisenhower Recession of 1958. The recovery summer is beginning, so let us look briefly at our return on assets. We have increased our net income, with interest payments (net of taxes) added back in as a ratio to total assets compared to 2008 (fig 12), but compared to 2007 we have actually decreased our income as a percentage of assets. That is troubling, and it is a trend to watch, but it is a place where we see we can gain efficiencies. If we can pare back the size of our balance sheet as we have this past year, mostly by the sale of land and securities (fig 10), we will be able to maximize the return on assets even with a comparable net income.
The final part to look at our profitability is our shareholders. We want to give back as much as possible to the owners of the company as possible. We have not been the best at that as we could be. The dividend yield ratio, a comparison of how much is given back to the shareholders in terms of the share price and the shares outstanding has slipped to just less than 2% compared to just less than 3% in 2007 (fig 12). A lot of the decline is based on the rise in the share price in the last two years, as it has increased from fifteen dollars to twenty-five dollars on the open market, and the dividend yield and the share price are inversely correlated. Another troubling issue concerning our investors is that the both the book value and the earnings per share have been shrinking, even with the perceived raise of 2009 over 2008. The good news is that company remains profitable and has increased total dividends per share even over 2007 levels. This is a pattern our shareholders can expect to continue as we grow in profitability and shrink the balance sheet.  
II: Liquidity Analysis for the Short Term Creditor
Our short-term creditors can be assured that our liquidity is growing in strength. Our long term-debt positions have decreased 24% in the last four years (fig 4), keeping our interest expenses in check. This decrease in liabilities has allowed our working capital to grow from negative $93200 to a positive $69400 in the last three years. This swing from a negative working capital to a positive working capital means that the value of our current assets have surpassed the value or our current liabilities. It also means that the current ratio, a comparison between these two figures has gone from less than one to more than one, showing that we finally have a surplus of fairly liquid assets. Of note is that the competition in our industry has consistently had a current ratio larger than we have had on hand, where the current assets are twice liabilities (fig 4). In our case, this is based on the larger amount of debt we carry relative to equities, and less on the amount of assets we have on hand.
At issue with the current asset structure is our reliance on accounts receivable. From a look at the common-size balance sheet (fig 10), it is easy to say that A/R is one of the largest asset classes we have. In fact, it is almost half the size of our net sales as a consistent A/R turnover ratio around two would indicate. This means either that we are giving too much leeway in terms of the sales of our products, or that we need to be more aggressive in our collections tactics of outstanding debt. This over-reliance on receivables as a large part of our current assets may inflate what we see as the cash position in the current ratio. Instead, it may show a bit of trouble since the quick, or acid-test ratio consistently being below one means that we are not as flexible short-term because a lot of our assets are in short-term debt that we have to collect from our customers. This is another position where we can improve and grow, as we can see that while we are taking 192 days to clear our receivable, the industry average is almost six months less than we are achieving (fig 12). Once we are able to make that change and rely less on A/R, we will have more cash on hand and thus a better liquidity position. A related issue is that we are not selling our inventory fast enough. We have traditionally turned over our inventory slower than our competition. This means that it could be out there being sold more even if we just raise the rate of sales. This will be hopefully be addressed in the coming year with the previously spoken of marketing push for Blamm!, so that we are not sitting on unproductive assets.
III: Solvency Analysis for the Long Term Creditor
In 2006, we expanded our balance sheet by issuing notes to fund the construction of our headquarters in River Forest, Illinois. These long-term notes funded the total cost of $38000 (with construction capitalized). This action had the effect of increasing our long-term debt over the prior year infinitely. Since that time, we have been diligent in paying off these liabilities. The long-term debt in that time has decreased from 19% to 15% of our total debt and equity position of the balance sheet (fig 10). In real terms, that is a non-inflation adjusted decrease of $7000. The consequence of this borrowing for the long-term creditor is that it massively increased our debt to equity level. Our current level of 83% is much higher than the industry average of 30%. Though we are paying that down over time, it remains one of the larger fractions of the same size balance sheet.  We have rolled it over to new bonds at a much lower rate than we were able to obtain in 2006. Though we have little faith that this current low interest rate environment will remain much beyond 2010, funding expansion with debt meant we did not have to dilute the pool of shares issued to build our headquarters, keeping up dividends per share.
IV: Concluding Remarks
We remain confident that the crisis of 2008 was just a blip in our earnings and the larger economy. We remain on a growth path, and look to the years prior to fiscal 2008 as our trend lines. Based on the preceding discussion, Concordia Corporation Ltd has three pointed goals that we need to work on for fiscal 2010.
The first goal is sales growth. As stated above, we are making a major push to position Blamm! as an everyday drink and not just a specialty soda. This will take marketing dollars, but it should also increase both gross sales and net income. 
The second goal is increasing turnover in both inventory and our accounts receivable. They lag the industry average and negatively affect our liquidity positions. They are also non-productive assets. We would rather invest the cash where we can seek yield and not in our warehouses or our customer’s pockets. On that front, we are making major efforts on making collections more efficient and in our just-in-time manufacturing. Most of our inventory is in raw materials, and we need to coordinate with our suppliers so those assets are used smarter.
Finally, we want to return more to our shareholders. To accomplish this goal, we have a two-part plan. First, we are increasing the dividend, as we have year-over-year; we also have plan to buy back a quarter of outstanding shares, so that our industry-beating earnings per share as well as the market price per share will increase.
With pride in the Concordia Corporation Ltd mission, and an eye for new opportunities, we feel that these specific actions will help grow our company’s growth and position it as a leader in the industry

Concordia Corporation Ltd
Balance Sheet

      2006 2007 2008 2009
Cash at Bank
 $    11,100.00  $    11,600.00  $    16,700.00  $    10,300.00
Cash on Hand
 $          400.00  $          400.00  $          600.00  $          600.00
Marketable Securities  $    12,800.00  $      4,300.00  $    10,900.00  $                   -  
Accounts Receivable
 $    20,400.00  $    37,800.00  $    35,000.00  $    37,400.00

 $    11,280.00  $    11,300.00  $    11,240.00  $    11,100.00
 $      4,720.00  $      4,370.00  $      4,560.00  $      4,850.00
Plant (Net)
 $    15,000.00  $    18,000.00  $    19,000.00  $    21,000.00

 $    40,000.00  $    40,000.00  $    40,000.00  $    30,000.00
Buildings (Net)
 $    70,000.00  $    64,000.00  $    54,400.00  $    60,400.00

 $    12,000.00  $    11,600.00  $    13,200.00  $    13,300.00

 $      2,000.00  $      1,600.00  $      1,200.00  $          800.00

Total  $  199,700.00  $  204,970.00  $  206,800.00  $  189,750.00


Accounts Payable
 $    46,400.00  $    52,890.00  $    49,270.00  $    35,210.00
Bills Payable
 $    18,000.00  $    18,000.00  $      8,000.00  $    11,000.00
Wages Payable
 $      7,800.00  $      4,800.00  $      9,900.00  $      8,400.00
Income Tax Payable
 $      5,500.00  $      3,400.00  $      3,600.00  $      2,700.00
Debentures (Long Term Debt)  $    38,000.00  $    32,200.00  $    39,000.00  $    29,000.00


Paid up Capital ($1 shares)  $    56,000.00  $    56,000.00  $    56,000.00  $    56,000.00
Share Premium Reserve  $      6,000.00  $      6,000.00  $      6,000.00  $      6,000.00
Retained Profits
 $    22,000.00  $    31,680.00  $    35,030.00  $    41,440.00

Total  $  199,700.00  $  204,970.00  $  206,800.00  $  189,750.00

Concordia Corporation Ltd
Income Statement
Year Ending June 30th 2009
        2007 2008 2009

Operating Revenue
 $  71,200.00  $  73,500.00  $  68,800.00

Cost of Goods Sold

Opening Inventory
 $  11,280.00  $  11,300.00  $  11,240.00

 $  43,000.00  $  45,200.00  $  38,000.00

 $  54,280.00  $  56,500.00  $  49,240.00
Closing inventory

 $  11,300.00  $  11,240.00  $  11,100.00

Cost of Goods Sold
 $  42,980.00  $  45,260.00  $  38,140.00
Gross Profit

 $  28,220.00  $  28,240.00  $  30,660.00



 $    6,800.00  $    8,200.00  $    9,900.00

 $    3,400.00  $    3,400.00  $    6,000.00

 $    6,500.00  $    5,000.00  $    5,000.00


 $    3,000.00  $    2,500.00  $    3,000.00

 $  19,700.00  $  19,100.00  $  23,900.00
Operating profit before income tax  $    8,520.00  $    9,140.00  $    6,760.00
Income Tax Expense
 $    3,400.00  $    3,600.00  $    2,700.00
Operating profit after income tax  $    5,120.00  $    5,540.00  $    4,060.00
Extraordinary items (after tax)  $    6,800.00  $  (1,000.00)  $    4,800.00
Operating profit after tax and ext. items  $  11,920.00  $    4,540.00  $    8,860.00
Retained Profits at 1 July
 $  22,000.00  $  31,680.00  $  35,030.00

 $  33,920.00  $  36,220.00  $  43,890.00
Dividends Paid (All Common)  $    2,240.00  $    1,190.00  $    2,450.00
Retained Profits at 30 June
 $  31,680.00  $  35,030.00  $  41,440.00     

Ratio Analysis

Concordia Corporation LLC
Industry Average

2007 2008 2009   2007 2008 2009
The Common Stockholder

Earnings Per Share

 $               2.38  $               0.91  $             1.77
 $       0.60  $       0.60  $       0.62

Gross Margin Percentage
39.63% 38.42% 44.56%

Price-earnings Ratio
6.292 22.026 14.108

Dividend Payout

 $               0.19  $               0.26  $             0.28

Dividend Yield Ratio
2.99% 1.19% 1.96%

Return on Total Assets
6.78% 2.93% 5.38%

Return on Common Shareholder's Equity 13.42% 4.76% 8.84%
11% 12% 11%

Book Value Per Share
 $            18.74  $             19.41  $           20.69

Profit Margin

16.74% 6.18% 12.87%
6.50% 8.50% 8.50%

The Short Term Creditor

Working Capital

 $    (9,320.00)  $       8,230.00  $     6,940.00

Current Ratio

0.882 1.116 1.121
2.1 2.1 2.2

Acid Test Ratio

0.684 0.893 0.843
0.9 1 0.9

A/R Turnover

2.45 2.02 1.90

Average Collection Period
149.18 180.76 192.05
125 124.5 125.3

Inventory Turnover

3.81 4.02 3.41
6 5.6 6.2

Average Sales Period
95.88 90.89 106.90

Long Term Creditor

Times Interest Earned Ratio
6.107 4.256 4.853

Debt-to-Equity Ratio
119% 113% 83%
30% 32% 30%

Saturday, August 9, 2014

Business Adventures?

Last month, I got an email with this lede:

“I recently read your review of Liar's Poker on Amazon.  I am pleased to announce the digital release of Business Adventures by former New Yorker staff writer John Brooks, a book that illuminating the world of Wall Street and provides insight into the success, or lack thereof, of some of the most well known companies.  Brooks is often considered the Michael Lewis of his time and much of Lewis’s style can be attributed to him.”

I initially turned the PR person down, in spite of the email and then that weekend an article ran about the book in the Journal. I still didn’t want it, mainly because they were offering only Kindle versions of the book. I then turned on my Amazon machine and found it at the top of my recommendations. So then I dug the offer out of my virtual trash and then read it?

So, was it worth it? Kind of. The structure of the book is that it is stories that first appeared in the New Yorker in the 60s. They cover contemporary stories of what was happening in business at that time. They were interesting, and the writing was very well done, but largely they don’t feel contemporary  (which they’re not) nor do they feel particularly relevant. Not that that’s important. Post-2008 I devoured everything on the financial crash that I could, and I bet a lot of that stuff won’t hold up in 50 years.

Two of the stories stood out. The first was an early history of the failure of the Edsel automobile. It was interesting and not something that felt like common knowledge. As opposed to a story of a crash, there felt to be something unique about the investigation. The other is a closing story about maintains exchange rates while currencies were on the gold standard. That is no longer relevant, but the author was able to convey the drama of the currency exchanges.

Overall, even with the imprimatur of Gates and Buffett, this is a book for someone who is interested in slices of the economic history of America 50 years ago. That is not to say that it is not important or worth it, but more a warning that it is not a general-interest business book as it might be positioned in some media. 

Needless to say, I received a complimentary copy for review.