Integrative Case 2 - Track Software, Inc.
Content
Integrative Case 2 - Track Software, Inc.
Seven years ago, after 15 years in public accounting, Stanley Booker, C C!, !, resigne" #is position as $anager of cost syste$s for %avis, Co#en, an" &'Brien ublic !ccountants an" starte" Track Software, Inc. In t#e 2 years prece"ing #is "eparture fro$ %avis, Co#en, an" &'Brien, Stanley #a" spent nig#ts an" weeken"s "eveloping a sop#isticate" cost-accounting software progra$ t#at beca$e Track's initial pro"uct o(ering. !s t#e )r$ grew, Stanley planne" to "evelop an" e*pan" t#e software pro"uct o(erings, all of w#ic# woul" be relate" to strea$lining t#e accounting processes of $e"iu$- to large-si+e" $anufacturers. !lt#oug# Track e*perience" losses "uring its )rst 2 years of operation2 an" 21its pro)t #as increase" stea"ily fro$ 211 to t#e present /2150. T#e )r$'s pro)t #istory, inclu"ing "ivi"en" pay$ents an" contributions to retaine" earnings, is su$$ari+e" in Table 1. Stanley starte" t#e )r$ wit# a 1, invest$ent #is savings of 5, as e3uity an" a 5, long-ter$ loan fro$ t#e bank. 4e #a" #ope" to $aintain #is initial 1 percent owners#ip in t#e corporation, but after e*periencing a 5, loss "uring t#e )rst year of operation /20, #e sol" percent of t#e stock to a group of investors to obtain nee"e" fun"s. Since t#en, no ot#er stock transactions #ave taken place. !lt#oug# #e owns only 6 percent of t#e )r$, Stanley actively $anages all aspects of its activities7 t#e ot#er stock#ol"ers are not active in $anage$ent of t#e )r$. T#e )r$'s stock was value" at 6.5 per s#are in 216 an" at 5.28 per s#are in 215. T T!B9: !B9: 1 T Track rack Software, Software, Inc., ro)t, %ivi"en"s, an" ;etaine" :arnings, 2<215 =et pro)ts
%ivi"en"s
Contributio n to
pai"
retaine" earnings
/10
/20
?/10 - /20@ A /0
2
/5, 0
/5,0
21
/2,0
/2,0
after ta*es > >ear ear
211
15,
15,
212
5,
5,
21
6,
1,
,
216
6,
,
6,
215
68,
5,
6,
Stanley #as ust prepare" t#e )r$'s 215 inco$e state$ent, balance s#eet, an" state$ent of retaine" earnings, s#own in Tables Tables 2, , an" 6, along wit# t#e 216 balance s#eet. In a""ition, #e #as co$pile" t#e 216 2 16 ratio values an" in"ustry average ratio values for 215, w#ic# are applicable to bot# 216 an" 215 an" are su$$ari+e" in Table 5. 4e is 3uite please" to #ave ac#ieve" recor" earnings of 68, in 215, but #e is concerne" about t#e )r$'s cas# Dows. Speci)cally, #e is )n"ing it $ore an" $ore "iEcult to pay t#e )r$'s bills in a ti$ely $anner an" generate cas# Dows to investors, bot# cre"itors an" owners. To gain insig#t into t#ese cas# Dow proble$s, Stanley is planning to "eter$ine t#e )r$'s 215 operating cas# Dow /&CF0 an" free cas# Dow /FCF0. Stanley is furt#er frustrate" by t#e )r$'s inability to a(or" to #ire a software "eveloper to co$plete "evelop$ent of a cost esti$ation package t#at is believe" to #ave GblockbusterH sales potential. Stanley began "evelop$ent of t#is package 2 years ago, but t#e )r$'s growing co$ple*ity #as force" #i$ to "evote $ore of #is ti$e to a"$inistrative "uties, t#ereby #alting t#e "evelop$ent of t#is pro"uct. Stanley's reluctance to )ll t#is position ste$s fro$ #is concern t#at t#e a""e" 8, per year in salary an" bene)ts for t#e position woul" certainly lower t#e )r$'s earnings earnings per s#are /:S0 over t#e ne*t couple of years. !lt#oug# t#e proect's success is in no way guarantee", Stanley believes t#at if t#e $oney were spent to #ire t#e software "eveloper, t#e )r$'s sales an" earnings woul" signi)cantly rise once t#e 2- to -year "evelop$ent, pro"uction, an" $arketing $arketing process was co$plete". it# all t#ese concerns in $in", Stanley set out to review t#e various "ata to "evelop strategies t#at woul" #elp ensure a brig#t future for Track Software. Stanley believe" t#at as part of t#is p process rocess,, a t#oroug# ratio analysis of t#e )r$'s 215 results woul" provi"e i$portant a""itional insig#ts.
T T!B9: !B9: 2 T Track rack Software, Software, Inc., Inco$e State$ State$ent ent /0 for t#e >ear :n"e" %ece$ber 1, 215 Sales revenue
1,55
9ess Cost of goo"s sol"
1,
Jross pro)ts
52
9ess &perating e*penses Selling e*pense Jen ener eral al an an" "a a" "$inis inistr trat ativ ive e e* e*pe pens nses es
15 2K 2K
%epreciation e*pense
11
T Total otal operating e e*pense *pense
61
&perating pro)ts /:BIT0
8
9ess Interest e*pense
2
=et pro)ts before ta*es
9ess Ta*es /2L0
12
=et pro)ts after ta*es
68
T T!B9: !B9: T Track rack Software, Software, Inc., Balance S#eet /0 %ece$ber 1 !ssets
215
216
Cas#
12
1
Marketable securities
82
!ccounts receivable
152
16
Inventories
11
165
T Total otal curr current ent assets
621
2
Jross )*e" assets
15
18
9ess !ccu$ulate" "epreciation
52
=et )*e" assets
12
128
55
6
!ccounts payable
1
12
=otes payable
2
1
!ccruals
2K
25
61
8
6
61
81
outstan"ing at .6 par value0
2
2
ai"-in capital in e*cess of par
;etaine" earnings
12
5
T Total otal stock#ol"ers' e3 e3uity uity
152
1
T Total otal liabilities an" stock#ol"er stock#ol"ers' s' e3uity
55
6
T Total otal assets 9iabilities an" stock#ol"ers' e3uity
T Total otal curr current ent liabilities 9ong-ter$ "ebt T Total otal liabilities Co$$on stock /5, s#ares
T T!B9: !B9: 6 T Track rack Software, Software, Inc., State$ent of ;etaine" :arnings /0 for t#e >ear :n"e" %ece$ber 1, 215 ;etaine" earnings balance /Nanuary 1, ;etaine" 2150
5
lus =et pro)ts after ta*es /for 2150
68
9ess Cas# "ivi"en"s on co$$on stock
5
/pai" "uring 2150 ;etaine" earnings balance /%ece$ber ;etaine" 1, 2150
12
T T!B9: !B9: 5 In"ustri al !ctual
!verag e
;atio
216
215
Current ratio
1.
1.82
Ouick ratio
.
1.1
Inventory turnover
1.6
12.65
!verage collection perio" /"ays0
2.
2.2
2.
.2
.K8
.55
5.
Jross pro)t $argin
2.1L
62.L
&perating pro)t $argin
5.5L
12.6L
=et pro)t $argin
.L
6.L
;eturn on total assets /;&!0
8.L
15.L
;eturn on co$$on e3uity /;&:0
.6L
6.KL
ricePearnings /P:0 ratio
5.2
K.1
MarketPbook /MPB0 ratio
2.1
2.2
T Total otal asset tur turnover nover %ebt ratio Ti$es Ti$e s interest ear earne" ne" ratio
T& %&
a. /10 &n w w#at #at )nancial goal "oes Stanley see$ to be focusingQ Is it t#e correct goalQ #y or w#y notQ
/20 Coul" a potential agency proble$ e*ist in t#is )r$Q :*plain.
b. Calculate t#e )r$'s earn earnings ings per s#are /:S0 for eac# year, recogni+ing t#at t#e nu$ber of s#ares of co$$on stock outstan"ing #as re$aine" unc#ange" since t#e )r$'s inception.
Co$$ent on t#e :S perfor$ance in view of your response respon se in part a.
c. Rse t#e )nancial "ata presente" to "eter$ine Track's operating cas# Dow /&CF0 an" free cas# Dow /FCF0 in 215.
:valuate your )n"ings in lig#t of Track's current cas# Dow "iEculties.
