CASE 3 ANSWERS

Group member:
Stephanie - 09913952
Ginny - 12576714
Vince - 12116684
Tyra - 09914166
Alex - 12116091

Question 1
Jeff Smith realizes that the first thing he must do is compare the liquidity, leverage,
activity, and profitability ratios of the two companies.
Using the income statement and balance sheet data shown in Tables 1 – 4, prepare a
detailed comparison report indicating the strengths and weaknesses of each
company.

As shown in the table above, Apex Current Ratio, Quick Ratio, and Cash Ratio has
significantly decreased from 2012 to 2015 while Duralex Current Ratio, Quick Ratio and
Cash Ratio only slightly change from 2012 to 2015.
● Apex Total Debt Ratio has slightly increased from 0.42 in 2012 to 0.54 in 2015
while Duralex has increased by almost double from 0.58 in 2012 to 1.05 in 2015.
● Apex has more Debt Equity Ratio compared to Duralex.
● In 2012, Apex had less Equity Multiplier compared to Duralex but in 2015 Apex
Equity Multiplier has slightly increased while Duralex’s drop by large margin.
● Both company’s TIE has significantly decreased since 2012 to 2015 by large
margin.

● Apex managed to increase the Profit Margin by 1% in 2013 and maintain it untill
2015 while Duralex profit margin dropped by a large margin from 6% in 2012 to
-24% in 2015.
● Apex managed to increase the ROA from 6% to 8% in 2013 and maintain it until
2015 while Duralex ROA dropped by a large margin from 7% in 2012 to 27% in
2015.
● Apex managed to increase their ROE from 11% in 2012 to 18% in 2015 while
Duralex dropped from 17% in 2012 to 6% in 2013 but in 2015, the ROE increased
to 493% due to the negative value in both net income and total equity during that
year.
Strengths:
● Apex was able to process their equity into profit very well throughout the year,
even increasing them by large margin from 2012 to 2013 and maintain it until
2015.
● Relatively stable times interest earned ratio indicates a consistent ability of both
companies to cover interest expenses with operating income.
● Duralex was able to liquidity their current assets and liabilities better than Apex.
Weaknesses:
● Apex wasn’t able to liquidity their current assets and liabilities very well as it kept
decreasing throughout the year from 2012 to 2015.
● Fluctuations in the debt-equity ratio and equity multiplier raise concerns about the
company's capital structure and debt management practices.
● Duralex has higher total debt ratios compared to APEX Molding suggesting a
higher reliance on debt financing and potentially higher financial risk.

Question 2
Jim Clancy, a recently hired intern, has suggested to Jeff that he should include an
analysis of common size statements in the report.
Is Jim right?
Of what use is such an analysis?
Please prepare such an analysis and explain your answer.
Jim Clancy, a recently hired intern, has suggested to Jeff that he should include an
analysis of common size statements in the report.
Improved Comparability: Raw financial statements can be difficult to compare, especially
between companies of different sizes. Common size statements express each line item as
a percentage of a base figure (like total sales or total assets). This allows you to compare
the relative importance of each item, regardless of the company's absolute size.

Trend Identification: By comparing common size statements from different periods for
the same company, you can identify trends. For example, you might see if a company's
cost of goods sold is increasing as a percentage of sales, indicating potential
inefficiencies.

Industry Benchmarking: Common size analysis allows you to compare a company's

He is right.
It shows how common size analysis can reveal trends. Here, we see revenue and expenses
have not grown proportionally, suggesting the company is not able maintaining its profit
margin. However, further analysis might be needed to understand why costs haven't
decreased as a percentage of sales (Year 1 vs. Year 5).

By including this analysis in your report, they provide a deeper understanding of the
company's financial health and its performance over time or compared to industry
benchmarks.

Question 3
Jim has also recommended that a DuPont analysis be done.
How can such an analysis be performed?
What information does it indicate about the relative performance of the two
companies?

As we can see, when using Dupont, the profit margin of Duralex is having a huge
problem with (-24%) and its Equity multiplier shows that it's using too much debt as
leverage. According to its IS, Duralex NI is heavily affected by its high COGS (74%),
which leads to the low profit margin. Also, Duralex’s liabilities in 2015 is 280.3,
exceeding its TA 265.8. Meanwhile, Duralex's rival is doing much better than it, with
efficient use of leverage and good yield in profit margin.
Question 4
What are some of the limitations regarding the various analyses that have been
suggested above?
What additional data would Jim and Jeff need to improve their findings?
Are there any other calculations and comparisons that would be helpful?

Analyzing Duralex Inc. and APEX Molding: A Look Beyond the Numbers

Here's a breakdown of these limitations and how a more comprehensive approach can be
taken:

Limitations of Financial Analysis:

- Snapshot in Time: Ratios offer a single point of data, missing trends and changes
over time.
- Industry Matters: Comparing companies in different industry segments with
unique business models can be misleading.
- Accounting Variations: Differences in accounting practices can distort
comparisons.
- Delayed Information: Ratios based on historical data may not reflect current
conditions.
- External Influences: Economic factors, regulations, and competition significantly
impact performance.

Going Beyond the Numbers:

- Market Analysis: Understanding the plastic molding industry's trends, growth, and
competitive landscape adds context to financial ratios.
- Operational Efficiency: Metrics like production efficiency, capacity utilization,
and customer satisfaction provide a more holistic view.
- Qualitative Factors: Management quality, brand reputation, innovation, and
customer relationships offer valuable insights.
- Future Outlook: Evaluating strategic plans, growth initiatives, risks, and potential
for sustainable advantage helps predict future performance.
 - Valuation Metrics: Comparing P/E, P/B, and other valuation multiples helps assess
stock attractiveness.
- Risk Analysis: Measures like the Altman Z-score or probability of default models
provide insights into solvency and creditworthiness.
- Sensitivity Analysis: Evaluating how changes in assumptions (e.g., sales growth or
costs) affect financial performance and valuation.

By combining financial analysis with these additional factors, we gain a richer

Question 5
After collecting, compiling, and analyzing the data, what conclusions and
recommendations would Jeff be justified in making in his report to Marcus?

Regarding to Duralex’s IS, its COGS is too high throughout recent years, the company
should find a way to reduce its COGS, such as find better deals with its suppliers;
improve its logistic management. The company could also find a way to boost its sales
for greater profit margin.
The firm could also follow some of this recommendations:
Increase Cash Flow:
Cut Expenses: Analyze your spending and identify areas where you can cut back. This
might include subscriptions you don't use, eating out less, or switching to cheaper service
providers.
Budgeting: Create a budget to track your income and expenses. This will help you
identify cost of sale, gross operating profit for improvement and ensure you're allocating
enough towards debt repayment.
Reduce Interest Rates:
Consolidation/Refinance: Consider consolidating multiple high-interest debts into a
single loan with a lower interest rate. This can simplify your repayment process and save
you money.
Negotiate: If you have a good payment history, try negotiating a lower interest rate with
your existing lenders.
Strategic Repayment:
Debt Avalanche: Focus on paying off the debt with the highest interest rate first. This
minimizes the total interest you pay over time.
Debt Snowball: Prioritize paying off the debt with the smallest balance first. Seeing
debts disappear quickly can be motivating and help you stay on track.
Sell Underused Assets: Consider selling assets you no longer need to generate extra cash
for debt repayment.
Increase Loan Payments: If your budget allows, allocate additional funds towards your
debt payments to accelerate repayment.