John MainieriACC 230, ____ _M Class

Balance Sheet Analysis

a. Significant Investments (% of Total Assets)

Cannondale Industry AverageAsset 1997 1996 1997 1996Trade A/R 48.1 47.3 25.2 25.6Inventory 23.7 27.8 38.6 38.8Property, Plant and Equip., net 18.2 16.9 17.9 17.5

Except for Property, Plant and Equipment, Cannondale’s asset mix does not seem reasonable when compared to the industry averages.

• Accounts Receivable are roughly twice the industry average. High receivables may be an indication of potential collection problems.

• Inventory appears low. While it is generally good not to tie your cash up in inventory, too little inventory may cause “stock out” problems and loss of revenue.

• Property, plant and equipment is in line with the industry.

b. Financing with Debt and Equity (% of total Assets)

Cannondale Industry AverageRatio 1997 1996 1997 1996Total Liabilities 35.9 37.9 59.6 61.9Total Stock Holders’ Equity 64.1 62.1 40.4 38.1

Cannondale is financed primarily by the owners (equity). Sixty four percent of the assets are financed by the owners compared to 36% by lenders. There is not much difference between years. The Company has very low debt compared to the industry average (about 60%).

c. Short-term vs. Long-term Debt (% of total Assets)

Cannondale Industry AverageRatio 1997 1996 1997 1996Total Current Liabilities 19.4 25.5 41.0 42.8Total Long-term Liabilities 16.5 12.5 18.7 19.1

Cannondale’s debt is primarily short-term. Current debt is about 20% of total assets in 1997, down from 26% in 1996 versus 17% and 13% for long-term liabilities. Both current and long term debt are significantly below the industry average.

John MainieriACC 230, ____ _M Class

d. Significant changes in the composition of assets and liabilities. • There are no significant changes in assets from 1996 to 1997.• There has been a significant decrease in current liabilities from 1996 to 1997, down from

26% to 19% of total assets. This is primarily due to the decline in accounts payable and revolving credit advances.

• Long-term debt increased from 12% to 16% of total assets. It appears that Cannondale has converted some of its short-term debt to long-term debt.

e. The Current Ratio• The Current Ratio measures short-term liquidity, the ability of the firm to meet needs for

cash as they arise. A higher ratio indicates greater liquidity.• The current ratio for both years was:

– 4.1 in 1997– $4.10 in current assets for each $1.00 in current liabilities– 3.2 in 1996– $3.20 in current assets for each $1.00 in current liabilities

• Cannondale’s current ratio increased from 3.2 in ’96 to 4.1 in ’97.• In ’97, 25% of the companies in the industry had a current ratio of more than 3.1.

Cannondale is in the top 25% of companies in the industry for both years.• Cannondale has excellent liquidity and should be able to pay it’s short term debt as it

comes due.– The company has $4.10 in current assets for each $1 in current liabilities.– The company’s liquidity increased since last year.– The company is in the best 25% of the companies in the industry in terms of

liquidity as measured by the current ratio.f. through k.

• Complete these requirements in a similar fashion to “e” above.

John MainieriACC 230, ____ _M Class

3. Summary and conclusion regarding the financial health of Cannondale, Inc.

Cannondale’s balance sheet seems to tell conflicting stories about the company’s financial health. Liquidity appears to be extremely good or extremely bad depending on the ratio one looks at. The current and quick ratios indicate good liquidity and that the company will be able to pay its bills when they come due. The “Days inventory held” ratio indicates that the amount of inventory on hand is about average for the industry and that Cannondale is not over reliant on inventory for its liquidity. The “average collection period”, however, indicates that the company may have trouble converting its accounts receivable into cash. Cannondale has a modest amount of debt on its balance sheet indicating low risk of default to lenders and the ability of the company to borrow in the future.

Based on the current ratio, Cannondale has excellent liquidity and should be able to pay its short term liabilities as they come due. The company had $4.10 in current assets for each $1 in current liabilities in 1997 which is an increase over the prior year. The company is in the best 25% of the companies in the industry in terms of liquidity as measured by the current ratio

The quick ratio measures short term liquidity more rigorously than the current ratio by eliminating inventory, usually the least liquid current asset. Even without inventory, Cannondale displays excellent liquidity and it appears that the company would be able to pay its short term obligations as they come due. In 1997 the company has $2.91 in quick assets for each dollar of current liabilities. This places the company in the best 25% of the companies in the industry with regard to liquidity.

While inventory levels appear to be under the industry average and under control, there is a dark cloud on the horizon. Cannondale has nearly twice the amount of accounts receivables as the industry average with 48% of its assets in accounts receivable as opposed to 25% for the industry. This is an indication that the company may not be able to collect its receivables. The company does have a liberal credit policy (up to 180 days to pay), but it is questionable as to whether this is a viable credit policy. The Average collection period for collecting its receivables is about 138 days which places it in the worst 25% of the companies in the industry with regard to liquidity. Only 25% of the companies in the industry have a collection period of more than 64 days.

Cannondale has a modest amount of debt on its balance sheet. There is relatively little risk in lending to Cannondale and the company has unused borrowing capacity. While the amount of debt increased, it decreased as a percent of total assets. A debt ratio of about 36% puts it in the best 50% of the companies in the industry and also far below the rule of thumb of financing 50% or less of your assets with debt.

In conclusion, Cannondale’s financial health is not what it should be. The balance sheet seems to tell conflicting stories about the company’s financial health. Although liquidity appears excellent when one considers the amount of current assts available to pay off its current liabilities, too much of its current assets are tied up in receivables which may not be collectible. I believe that Cannondale’s credit policy may be too liberal. On the other hand, the company’s debt appears low and manageable, if receivables are collectible.