Constructing Pro-Forma Statements (Heartland Express) - Term Paper Example

?PRO-FORMA MENT The company under consideration is Heartland Express, a renowned and a considered leader in the United s when it comesto transportation and logistics. Heartland Express has been in business for quite a long time, delivering exceptional services to its customers and enabling the companies to improve their support their logistics infrastructure. The company’s headquarters are situated in the North Liberty, Iowa and operating office and shop combined regional terminal locations in nine states and two shop only locations outside of Iowa. For the past many years the company has been enjoying stable and strong financial outlook. For the financial year ending December 31, 2010 the company posted net earnings amounting to $ 62.216 million which represents an increase of 9% from the previous financial year. For the Pro-Forma Statement, the financial statement under consideration is for the financial year 2011. For the financial year 2011, the operating revenue for the company is $528,623. It has been assumed that the company has earned equal operating revenue of $132,156 each quarter. Other items in the income statement i.e. Operating Expenses, Operating income and financial charges remain the same and are evenly distributed through the year. The following Pro-Forma statement has been prepared on the assumption that in the first quarter of the year the sales have been increased by 20% whereas in the third quarter sales have been decreased by 10% of the original. The sales in the second and third quarter remain the same. Q1 Q2 Q3 Q4 Operating Revenue 158,587 132,156 118,940 132,156 Operating Expenses Salaries, wages and benefits 41,679 41,679 41,679 41,679 Rent and purchased transportation 1,882 1,882 1,882 1,882 Fuel 40,479 40,479 40,479 40,479 Operations and maintenance 5,235 5,235 5,235 5,235 Operating taxes and licenses 2,306 2,306 2,306 2,306 Insurance and claims 3,286 3,286 3,286 3,286 Communications and utilities 739 739 739 739 Depreciation 14,307 14,307 14,307 14,307 Other operating expenses 3,638 3,638 3,638 3,638 Gain on disposal of property and equipment (8,033) (8,033) (8,033) (8,033) 105,517 105,517 105,517 105,517 Operating Income 53,070 26,639 13,424 26,639 Interest Income 193 193 193 193 Income before income taxes 53,264 26,833 13,617 26,833 Federal and state income taxes 9,350 9,350 9,350 9,350 Net income 43,914 17,483 4,267 17,483 FINANCIAL STATEMENT ANALYSIS THROUGH RATIO ANALYSIS A method widely used by the investors and analyst in order to evaluate and analyze the financial history of the company is the ‘Ratio Analysis’. Ratio analysis is a very accurate and reliable tool when it comes to analyzing the financial outlook of an entity. The primary reason to conduct a ratio analysis is to quantify the results of the operations of a company and compare them with that of the prior year(s) in order to assess different aspects of the financial feasibility. The ratios can be divided into various categories such as profitability, gearing and liquidity, each focusing on a different area of the financial outlook of the organization and highlighting the company’s performance. The financial analysis of Heartland Express is divided into three main categorize namely Profitability, Liquidity and Gearing. Profitability Ratios   2011 2010 2009 2008 2007 2006   Profitability Ratios Gross profit margin 20.16% 18.31% 17.18% 15.66% 18.66% 21.58% Net profit margin 20.30% 18.59% 17.69% 17.12% 20.40% 23.63% ROCE 31.50% 27.79% 22.11% 29.74% 35.22% 27.30% EPS 0.78 0.69% 0.62 0.73 0.78 0.89 Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials [1], variable cost related to labor and fixed costs such as rent and depreciation of property plant and equipment. The gross profit margin analysis of the last five years shows that subsequent to the financial year 2006, the gross profit margin declines. Though the sales of the company kept on increasing subsequent to the financial year 2006, but the cost of sales increased with a greater margin as compared to the percentage increase in the sales. The following table further explains this fact 2009 2008 2007 2006 In thousands Sales 459,539 625,600 591,893 571,919 Cost of Sales 380,575 527,653 481,443 448,502 Cost as percentage of Sales 82.82% 84.34% 81.34% 78.42% Net profit margin, on the other hand analyzes the profitability of the company before deducting the taxation and finance charges from the earnings [2]. The ratio is calculated by dividing the profit before interest and tax with the sales revenue of the current financial period. The ratio highlights how well the company is managing its selling and administrative expenses it also highlights the other income generated by the company during the course of its operations. The net income follows the same trend as the gross profit margin. Return on capital employed (ROCE) is, according to the analyst, is considered to be the most significant ratio in order to evaluate a company’s performance from an investor’s point of view. ROCE measures a company’s ability to earn a return on all of the capital that is being employed by the company [3]. The return on capital employed fluctuates during the past five years, the highest being recorded in the financial year 2007. The ratio is calculated by dividing net income for the year with the capital employed by the company. The following table further clarifies the ROCE pattern over the year Financial Year Net income Capital Employed ROCE 2011 107,330 340,771 31.50% 2010 92,873 334,187 27.79% 2009 81,302 367,670 22.11% 2008 107,079 360,039 29.74% 2007 120,735 342,759 35.22% 2006 135,149 495,024 27.30% As it is obvious, the net income decreased during the from the financial year 2006 to the financial year 2007 but so did the capital employed which was reduced by due to the massive amount of dividend paid by the company amounting to around 203 million. Thus the overall impact was the increase in ROCE. Moving forward, the net income keeps on decreasing and showing a declining trend since financial year 2009, and so did the ROCE fall. The decrease in the capital employed was due increase in accumulated comprehensive losses and dividend paid out of the earnings. Earnings per share (EPS) are considered one of the most important financial ratios from the investor’s point of view. The ratio highlights the average earnings from the shares transacted and is calculated by dividing the profit attributable to the common share holders and multiplying them with the weighted average number of shares outstanding during the period. The EPS has shows a declining trend all over the recent past. The net income of the company started decreasing after the financial year 2006 which is explained in the table mentioned above (Critical Analysis of the Company’s Financial History). This decrease is primarily due to the increase in the cost of production which is already represented through the declining trend showed by the net profit margin and the net income margin. Earnings per share represent the amount earned by the investor per $1 invested by him. For example in the financial year 2006, the investor earned $0.89 per $1 invested. The movement in the EPS over the years is explained by change in the no. of weighted average number of shares outstanding (which could have changed due to investors selling their shares) and the change in the net income. Liquidity and Efficiency Ratio 2011 2010 2009 2008 2007 2006 Liquidity Current ratio 4.67 3.96 2.65 1.32 2.91 3.53 Acid test ratio 4.39 3.83 2.51 1.26 2.86 3.48 Debtors turnover period 11.96 12 12.3 17 13.34 13.15 Inventory turnover 43.53 62.07 58.42 94.11 97.85 174.94 The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [3]. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. An overall analysis of the ratio would portray that in all the years the company had enough assets to pay off its obligations and debts. In the financial year 2007, the current ratio decreases from 3.35 to 2.91 due to the decrease in the current assets of the company by a staggering 32% which majorly pertains to the decrease in the short term investment from 322 million to 186 million. The cause of the decrease in the current ratio for the financial year 2008 also pertains to the massive decrease in the short term investment. The reason for this decline is during that particular period, the equity shares market was going through its worst time. The companies rather than recording losses on market to market of these securities started selling these securities in the stock market. The acid test, which is also regarded as the quick ratio, is calculated by subtracting the inventory balance from the total current assert balance. . Out of the current assets mentioned, inventories are regarded as the one which takes comparatively more time to be converted into cash or cash equivalent. The acid test ratio has followed the same trend as the current ratio. Receivable turnover represents how quickly the cash is received from the debtors. The ratio is calculated by dividing the revenue generated from the sales by the receivable balance as mentioned in the balance sheet of the company. The formula calculates the number of times the debtors are turned over during a year. The higher the value the more efficient the management is or it could also mean that the debts are more liquid. This particular ratio has shown inclining trend over the last five years which shows that the company is committed towards enhancing its revenue collection capabilities. The following table further analyses the ratio Financial Year Sales Receivable Turnover Period 2011 528,623 44,198 11.96 2010 499,516 41,619 12.00 2009 459,539 37,361 12.30 2008 625,600 36,803 17.00 2007 591,893 44,359 13.34 2006 571,919 43,499 13.15 Receivable turnover ratio implies how much of the sales are made on cash and how much is on credit terms. Higher the ratio the more beneficial it is for the company. For Heartland Express, the revenue collection period has been deteriorating as the turnover ratio has decreased as 13.15 from the year 2006 to 11.96 in the financial year 2011. The lower ratio implies that the company is giving more credit time as compared to what it was in the past. This is a negative sign for the company as it should try to improve this ratio and ensure the timely collection of the imparted ratio. This fact can also be observed from the fact that the receivable balance of the company has also been increasing. Inventory turnover represents how quickly a company’s inventory is sold, which can be calculated by dividing the sales revenue by the average inventory balance as at the year end. High inventory level is not beneficial for the company as it represents that the company’s investment is tied in inventory and currently it is not generating any income. A lower inventory turnover period represents that the sales are poor and there is excess inventory in the storage. Whereas a higher turnover period might represents that sales are comparatively higher. An inventory turnover period can also decreased due to the shift in the operation policy of the management e.g. if the management decides to increase the level of ‘safety stock’ then the balance of closing inventory would be greater and thus inventory turnover period would decrease, although the sales would have increased during the period. Inventory turnover ratio was quite for Heartland express limited in the financial year 2006 and 2007 which represents that the company’s sale were rocketing sky high and the company was able to turn its inventory into revenue quickly. It is very important to compare the inventory turnover ratio with the industry average, and it would reveal us the fact that during financial year 2006 and 2007, the inventory turnover ratio of the companies engaged in the same business was also high as the economy was facing a boom during that phase. The ratio took a downward plunge during the post liquidity crisis in the financial year 2008 and 2009 when although the sales of the company increased by the cost of goods sold increased with a greater proportion. The ratio has been the lowest for the company in the financial year 2011 and the company should give proper attention to this particular fact. Gearing Ratios 2011 2010 2009 2008 2007 2006 Gearing Ratios Equity ratio 0.65 0.66 0.67 0.65 0.65 0.74 Debt ratio 0.35 0.34 0.33 0.35 0.35 0.26 Debt : equity ratio 0.65:0.34 0.66:0.34 0.333 : 0.667 0.354 : 0.646 0.349 : 0.651 0.26 : 0.74 Borrowing ratio 0.41 0.37 0.37 0.26 0.26 0.12 The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [4]. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum [4]. The equity ratio indicates how much of the entity’s assets are financed through the finances generated through the revenue generated from the operations of the entity and raising financing through equity issue rather than acquiring debts or other financial institution. The company’s equity ratio decreased from the financial year 2006 to financial year 2007 representing that the majority of the company’s asset was financed through debt. Heartland express does not face any financial risk which can be defined as the fact when the company acquires long term financial debts (obligation) and subsequently it does not have any means to pay off the principal and interest on that debt. Analysis of the balance sheet of the company presents the fact that the company does not have any long term or short term financial debt. The only liability it has is of trading nature and is not interest bearing. The change in the equity ratio is only due to the change in the shareholder’s equity of the company which changes over period due to fluctuation in retained earnings and other comprehensive losses. Debt ratio is always the opposite of the equity ratio and thus represents s a reciprocal trend. Another ratio to assess the financial leverage of the company is by calculating the borrowing ratio of the company. The ratio is calculated by dividing all the short term and long term borrowing of the company in the form of overdraft, long term loan and finances etc., with the shareholder’s equity. The borrowing ratio presents similar trends as the debt ratio, and also due to the fact that the ratio uses the same dependents. The borrowing ratio represents how much of the net asset of the company have been financed through borrowed funds. The ratio is the lowest in the financial year 2006, 2007 and 2008 but subsequently the ratio increases due to the massive increase in the insurance accrual during the financial year 2009 and 2010. References [1] Richard Loth “Financial Ratio Tutorial.” investopedia.com. Investopedia, n.d. Web. 29 July 2012. Read More