Analyzing Mountain Corp

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Analyzing Mountain Corps Financials

• A Purposefully Superficial Approach

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Compute a few ratios.

• Your initial analysis of Mountain Corp. was
  comprised of a few quick ratio calculations, and
  revealed the following.

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Finding 1

• The firm has higher ROE than competitors.
  However, it also has higher leverage, as measured
  by the debt-to-asset ratio. The higher leverage
  rather than profitability -- is driving the
  higher ROE.

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Finding 2

• Efficiency ratios such as accounts receivable and
  inventory turnovers appear to be near those of
  competitors.
• Fixed asset levels are also in line, as
  determined by total asset turnover.

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Finding 3

• The only evident trends are that the current
  ratio has declined for three years, and now
  stands at 1.25. The times-interest earned has
  also declined, and is now 75 as high as the
  industry average.

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Heres what you missed

• A LIFO liquidation was responsible for one-third
  of your profit, and was also the (only) cause of
  inventories being in line.
• This source of profit is hard to repeat.

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Missed 2

• The firm made no contribution to its defined
  benefit pension plan, but it did raise expected
  return on plan assets to 10.5 for the
  foreseeable future.
• Again, a false sense of profit.

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Missed 3

• The firms newest leases have not been
  capitalized, although all earlier leases were.
• Using operating leases sometimes is a disguise
  for extra debt.

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Missed 4

• The firm now assumes that 4 of receivables will
  be uncollectible in the future. In the past the
  uncollectible portion has been 8, and no
  policies have been altered.
• Which percentage appears realistic?

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Missed 5

• The firm lost 500,000 last year on its foreign
  operations, because of currency translations.
  The firm remains unhedged as far as foreign
  currency risk.
• Whats expected to happen to the U.S. dollar in
  the future?

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Missed 6

• Raw materials used in our production processes
  are expected to inflate in price severely over
  the next few years.
• You might have learned this by reading the
  Management Discussion Analysis (MDA).

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Missed 7

• A new competitor is on the scene and Mountain
  Corp is now the high-cost producer (of a somewhat
  homogeneous product).
• A rosy future? Again, read the MDA.

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Missed 8

• The goodwill figure shown on the balance sheet
  has been impaired, according to analystsbut it
  wasnt written down.
• Just an oversight? Doubtful.

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Missed 9

• Diluted EPS are significantly lower than basic
  EPS, due to the existence of unexercised employee
  stock options (that are in the money).
• Which EPS figures have you been focusing on?

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Missed 10

• Earnings quality is considerably lower than
  industry norms (see Appendix 2B for a thorough
  explanation of earnings quality).

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Summary

• We may not prevent all future Enrons,
  WorldComs, or Parmalats, but we easily can be
  trained to avoid some of the more common
  manipulations or oversights.
• Thats our goal during this semester.