O.M Scott and Sons

8/18/2019 O.M Scott and Sons

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A Case Study on

O.M Scott & Sons Co.



Table of Contents

Objective……………………………………………………….…………1

Company Background……………………………………………………1

Ratio Ana ysis…………………………………………………………….1

!ro "orma Ana ysis……………………………………………………….#

Sensitivity Ana ysis……………………………………………………….#

Recommendations $or Management………………………………………%

Summary o$ Case Study…………………………………………………..%

Appendi ………………………………………………………………….'



Objective

()is paper *i seek to ana y+e t)e $inancia statements o$ t)e O.M Scott & Sons Company

during t)e years 1,'- 1,/10 in order to provide readers *it) a t)oroug) understanding o$ t)e

various $actors t)at may in$ uence t)e $uture success o$ t)is business. Additiona y0

recommendations based on an ana ysis o$ t)eir $inancia statements *i be o$$ered $or t)e

management o$ O.M Scott & Sons to imp ement in t)e $o o*ing years.

Company Background

ead2uartered in O)io0 t)e O.M Scott & Sons Company )as operated in t)e a*n care industry

since 13/3 and )as gro*n into a success$u business *it) a positive out ook. 4n $act0management *it)in t)e company set an ambitious goa o$ increasing annua gro*t) rate in sa es

and pro$its to 5'6 in t)e year 1,',. According to management0 one o$ t)e main $actors imiting

O.M Scott & Sons companies7 gro*t) *as t)e inabi ity $or t)eir dea ers to carry a su$$icient

amount o$ stock $or customers. o*ever0 company o$$icia s $ee t)at t)eir use o$ a trust receipt

program and ot)er decisions *i bene$it t)e company7s current $inancia standing.

Ratio Analysis

An eva uation o$ t)e pro$itabi ity0 turnover contro 0 and everage8 i2uidity ratios s)eds ig)t on

severa strengt)s and *eaknesses maintained by t)e O.M Scott & Sons Company.

4n regards to t)e profitability ratios 0 return on e2uity is s)o*n increasing bet*een t)e

years 1,'- 1,/9 reac)ing a peak o$ 596. A o* RO: in 1,/1 o$ 1#6 indicates t)at t)e company

is not per$orming as *e as it s)ou d and is not co ecting accounts receivab e in a time y

manner. ;ike*ise0 a decreasing trend $or Return on Assets suggests t)at O.M Scott & Sons is

unab e to e$$icient y use its assets to generate pro$its. ()is may be attributed to an increase in

tota assets during t)e past t)ree years. Regarding pro$it margin0 an up*ard trend is apparent



bet*een t)e years 1,'- 1,/9. o*ever0 a drop to .9#/% in 1,/1 demonstrates t)e negative

impact t)eir (rust Receipt ! an )ad on t)eir pro$it margin.

Concerning t)e turnover control ratios 0 t)e reduced asset turnover rate beginning in

1,', is attributab e to )ig) tota assets maintained by t)e company0 *)ic) decreased t)eir abi ity

to generate sa es on eac) do ar o$ asset by #16. A decrease in inventory turnover takes p ace

bet*een 1,'- 1,', going $rom /./5#' to #.%%,9. <espite t)is decrease0 a s)arp increase occurs

in t)e $o o*ing years to a peak o$ -.--9-. ()is increase s)o*s t)e di$$icu ty O.M Scott & Sons

)as in turning over inventory into sa es. Most a arming is t)e dramatic increase in co ections

period in 1,/9. An increase $rom /, days to a most 1'9 days takes p ace $o o*ing t)eimp ementation o$ t)eir (rust Receipt ! an. !rior to 1,/90 t)ese numbers *ere re ative y stab e

indicating t)at t)e (rust Receipt ! an is one o$ t)e primary $orces driving t)ese trends.

Additiona y0 accounts receivab e turnover and operating cyc e bot) su$$ered due to t)e (rust

Receipt ! an. ()e operating cyc e ratios suggest t)at management isn7t per$orming at an e$$icient

eve . ;ast y0 t)e cas) conversion cyc e increases t)roug)out t)e years reac)ing a peak o$ 139

days in 1,/1. O.M Scott & Sons s)ou d *ork to reduce t)e number o$ days $or t)e cas)

conversion cyc e to minimi+e $inancia stress.

Leverage and liquidity ratios in respect to t)e O.M Scott & Sons Company vary *ide y.

()e overa i2uidity o$ t)e company does not indicate t)at ack o$ cas) *i impede t)eir

operationa abi ity. A t)oug) t)e current ratio increases to a )ig) o$ %.5,,, in 1,/90 t)eir abi ity

to meet s)ort term ob igations s)ou d not be a$$ected. o*ever0 it may indicate t)at t)ere is too

muc) inventory or cas) cou d be better spent in ot)er areas o$ t)e business. ()e $inancia

everage ratio increases $rom a o* o$ .'##' in 1,'-0 to a )ig) o$ 1.#,53 in 1,/1. ()is c)ange

s)o*s t)at t)e company is becoming more dependent on using debt to $inance its assets.



Pro orma Analysis

4n terms o$ t)e $inancia out ook $or t)e O.M Scott & Sons Company $or t)e ne t $e* years0

t)ere are severa notab e c)anges t)at occur as a resu t o$ t)e c)anges management enacted

t)roug) 1,'- 1,/1. 4t is important to note t)at bot) t)e pro $orma income statement and ba ance

s)eet assume a 5#.'6 annua compounded gro*t) $igure based on t)e years stated ear ier.

:mp)asis *i be p aced on $orecasted numbers $or t)e years 1,/5 1,/% in order to provide

readers *it) projected $igures estab is)ed t)roug) severa key assumptions.

Cost o$ goods so d *i continue to be an area t)at $urt)er increases as a resu t o$

management decisions. =e estimate t)at CO>S *i increase $rom %5#3,.#' to /%/51.3,0 *)ic)is an increase o$ '56. 4t is imperative t)at CO>S be minimi+ed in order increase pro$itabi ity $or

t)e company. <ue to O.M Scott & Sons )ig) accounts receivab e turnover period0 *e $orecast

t)at t)e increasing accounts receivab e bet*een 1,/5 1,/% $rom ?5/0'%/./- to ?%90%/,.,- *i

prove to be prob ematic $or t)e company. "urt)ermore0 O.M Scott & Sons e terna $inancing

re2uired e ceeded t)e ?15.' mi ion ine o$ credit issued in 1,/1 by ?,1%01#9 t)e $o o*ing year

according to our pro $orma statement. ()ey *i need to ac2uire e tra $unds in order to $inance

t)eir operations.

!ensitivity Analysis

An accounts receivab e and cost o$ goods so d scenario ana ysis *as constructed *it) t)e aim o$

ana y+ing $uture period resu ts0 using di$$erent variab es to take into account c)anges t)at may

occur to t)e pro $orma statement. <ecreases in bot) AR and CO>S $rom '0190 and 59 percent are

used to s)o* di$$erent scenarios t)at take p ace assuming t)ese c)anges take e$$ect bet*een

1,/5 1,/%. 4$ O.M Scott & Sons is ab e to reduce t)eir accounts receivab e0 t)eir co ection

period eac) year *i dec ine signi$icant y. Assuming a 196 reduction in AR0 t)e company *i



e perience a dec ine o$ 5-6 in 1,/% moving $rom 135 days to just 1## days. ()e cas)

conversion cyc e *i a so bene$it $rom a decrease in retained earnings moving $rom 1'3 days to

11- days. Reductions to CO>S can )ave a positive a$$ect on pro$it margins as s)o*n in t)e

sensitivity ana ysis. 4n $act0 a 196 decrease in cost o$ goods so d resu ts in a dramatic increase in

pro$it margins. Assuming t)e reduction in CO>S takes p ace0 pro$it margin rises to %1,6 in

1,/% *it) a c)ange $rom .9'1% to .5/-9.

Recommendations for "anagement

As stated t)roug)out t)is paper0 it is essentia t)at management do a*ay *it) t)eir trust receipt

p an. Since its inception0 t)e trust receipt p an )as reduced sa es and )as negative y a$$ected t)ecompany7s abi ity to reac) its targeted gro*t) rate o$ 5'6. Anot)er $actor impeding t)eir

pro$itabi ity is cost o$ goods so d. Reducing CO>S using supp y c)ain management tec)ni2ues

can dramatica y increase O.M Scott & Sons pro$it margin. ()e arge amount o$ time it takes to

receive accounts receivab e is an additiona issue $acing t)e company7s goa o$ a 5'6 gro*t)

rate. Reducing t)e cas) cyc e can be accomp is)ed by se ing receivab es at a discounted rate in

order to receive cas). ;ast y0 :"@ *i ike y e ceed 15.' mi ion in 1,/50 *)ic) can be so ved

by issuing e2uity to minimi+e $inancia stress.

!ummary of Case !tudy

()e $ormu ation and ana ysis o$ $inancia ratios0 pro $orma statements0 and a sensitivity ana ysis

*it)in t)is report suggests t)at t)ere are severa pivota areas t)at O.M Scott & Sons cou d

c)ange in order to improve t)e monetary success o$ t)e company. !ro$itabi ity0 turnover contro 0

and everage8 i2uidity ratios s)o*ed t)at bet*een 1,'- 1,/10 t)is company ine$$icient y used

assets to generate pro$its e periencing a dec ine in pro$it margin due to t)e trust receipt p an. An

increase in co ection period0 cas) conversion cyc e0 and $inancia everage took p ace as s)o*n



in t)e ca cu ated ratios. ()e pro $orma ana ysis revea ed t)e degree to *)ic) cost o$ goods so d

*as in$ uencing t)e company7s pro$it margin and t)e e terna $inancing prob em $acing O.M

Scott & Sons. 4n order to $urt)er understand t)e impact a reduction in accounts receivab e and

CO>S *ou d )ave on t)e company in t)e $o o*ing years0 a sensitivity ana ysis invo ving t)ese

variab es *as constructed. C)anging t)ese variab es by just 196 cou d )ave positive e$$ects $or

O.M Scott & Sons pro$it margin and co ections period. ;ast y0 recommendations *ere given in

order to improve some o$ t)e $au ts t)at are impeding O.M Scott & Sons abi ity to increase

pro$itabi ity.

Appendi#

"igure 1 A



"igure 5 A



"igure # A



"igure % A

Key Assumptions: Pro Forma Income Statement growth based on 1957-1961 annually compounded

growth of 2 !5"



"igure ' A

"igure - A

Key Assumptions: Pro Forma #alance Sheet growth based on 1957-1961 annually

compounded growth of 2 !5"

F$gure 6-%



"igure 3 A







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