1.

Jack Brown 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 14 prepare a detailed
comparison report indicating the strengths and weaknesses of each company.

Plastichem - Ratio Analysis

2004
Current Ratio
Quick Ratio
Cash Ratio
Total Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Times Interest Ratio
Cash Coverage Ratio
Inventory Turnover ratio
Day's sales in Inventory
Receivables Turnover
ACP or Days' Sales in
Receivables
Total Asset Turnover
Capital Intensity

1.3011272
0.859903
4
0.051529
8
1.054552
3
19.12413
8
18.33103
4
0.763392
9
1.580357
1
8.109489
1
45.00900
1
6.442516
3
56.65488
2
1.1173815
0.894949
5

2003

2002

1.5229
8
1.1410
5
0.0760
7
0.8354
2

1.46231
2
1.03852
6
0.08375
2
0.82941
2

5.0247
3

4.86206
9

6.0759
7

5.86206
9
1.96153
8
2.90384
6

1.91133
2.7093
6
7.6556
47.677
5
4.9328
9
73.993
2
0.8549
1.1697
3

6.324111
57.7156
3
5.03792
4
72.4504
8
0.74235
3
1.34706
8

2001
1.309434
0.826415
0.022642
0.575453
1.35545
2.35545
2.442308
3.538462
6.570313
55.55291
6.186603
58.99845
1.300805
0.768755

Profit Margin
ROA
ROE

0.240740
7
0.268999
2
4.9310

0.0068

0.01465
9

0.0058
2
0.0353
4

0.01088
2
0.06379
3

0.056458
0.073441
0.172986

DCM - Ratio Analysis

Current Ratio
Quick Ratio
Cash Ratio
Total Debt Ratio
Debt-Equity Ratio
Equity Multiplier
Times Interest Ratio
Cash Coverage Ratio

2004

2003

2002

2001

1.631
8

1.517
6
0.929
6
0.055
3
0.596
4
1.353
1
2.477
4
5.608
7
7.652

1.825
8

2.094
6
1.567
6
0.391
9
0.416
7
0.609
5
1.714
3

0.99
0.014
9
0.543
8
1.1168
2.192
2
4.666
7
6.566

1.1136
0.022
7
0.560
9
1.135
2
2.277
6
5.388
9
7.444

8.6
12.8

Day's sales in Inventory

7
6.403
1
57.00
4

Receivables Turnover

6.905

ACP or Days' Sales in Receivables

52.86
1.371
8

Inventory Turnover ratio

Total Asset Turnover

Capital Intensity
Profit Margin
ROA
ROE

0.729
0.059
1
0.081
0.177
6

2
5.914
5
61.71
2
6.627
3
55.07
5
1.216
6
0.821
9
0.061
9
0.075
3
0.186
4

4
5.904
3
61.82
6.592
3
55.36
8
1.339
1
0.746
8
0.057
2
0.076
6
0.174
4

6.974
4
52.33
5
6.171
4
59.14
4
1.2
0.833
3
0.053
2
0.063
9
0.109
5

To determine the liquidity, we used the quick ratio, current ratio, and interest coverage ratio. From these equations, the higher
the ratios meant the better of the companys financial condition, or more liquidity. The acceptable ratios vary from different
industries. In general, companys quick ratio should be 1 or higher, and its current ratio should be above 1.5 to be considered
liquid. In the comparison between two companies ratios, DCM Molding has shown a better financial condition on average in the
past four years, and Plastichem has barely met the acceptable average or is below the average in the past four years.
To measure the leverage, we calculated the debt-equity ratio. Plastichem had a relatively high Debt-Equity Ratio, which
indicated that Plastichem was using many debts to finance its growth. High Debt-Equity Ratio also indicated that Plastichem
bore more risk because the cost of debt (interest). The company would make more profit if the incremental profit exceeds the
incremental cost of debt; however, the company may lose more money/ make less money if the incremental profit is less than
the incremental cost of debt.

To determine the profitability, we calculate the Profit Margin, ROE, and ROA. By looking at the ratios, Plastichems profit has
dropped in the past four years. The high leverage may have enlarged the loss of the company. On the other hand, DCM
Molding has shown a steady income/profit over the years.

2. Jay Singh, a recently hired intern, has suggested to Jack that he should include an analysis of common size statements
in the report. Is Jay right? Of what use is such an analysis? Please prepare common size balance sheets and income
statements for Plastichem and DCM Molding and discuss your findings.

Jay is right, they should include a common size statement (vertical analysis) in the report. This analysis will allow Jay and Jack to
compare common size income statement analysis is stating every line item on the income statement as a percentage of sales and
the balance sheet in comparing everything to total assets. Since there is more than one year of financial data, you can compare
income statements to see your financial progress. This type of analysis will let you see how the revenues and the spending on
different types of expenses change from one year to the next. In addition it will allow you to compare two different companies of
different sizes.
It also allows you to benchmark the company with it rivals. This helps create forecast as to where the company will be in the next
coming years.
DCMMOLDINGAnnualBalanceSheet

2004%

2003%

2002%

2001%

Cashandmarketablesecurities

0.33%

1.25%

0.47%

8.06%

Accountsreceivable

19.87%

18.36%

20.31%

19.44%

Inventory

14.32%

13.34%

14.69%

10.83%

OtherCurrentassets

1.89%

1.48%

2.19%

4.72%

TotalCurrentAssets

36.40%

34.44%

37.66%

43.06%

47.28%

42.08%

43.44%

56.39%

ASSETS
CurrentAssets

NonCurrentAssets
Property,Plant&Equipment,Gross

Accumulateddepreciation&Depletion

17.20%

12.66%

11.09%

10.83%

Property,Plant&Equipment,Net

30.08%

29.42%

32.34%

45.56%

Intangibles

33.30%

35.46%

28.44%

5.28%

OtherNonCurrentAssets

0.22%

0.68%

1.56%

6.11%

TotalNonCurrentAssets

63.60%

65.56%

62.34%

56.94%

TotalAssets

100.00%

100.00%

100.00%

100.00%

LIABILITIESANDEQUITIES

CurrentLiabilities

Accountspayable

7.66%

8.10%

8.28%

5.56%

ShortTermDebt

7.44%

6.61%

4.22%

7.50%

OthercurrentLiabilities

7.21%

8.10%

8.28%

18.06%

TotalCurrentliabilities

22.31%

22.69%

20.63%

20.56%

NonCurrentliabilities

Longtermdebt

28.63%

31.93%

29.22%

15.00%

DeferredIncomeTaxes

0.11%

0.57%

0.00%

3.89%

OtherNonCurrentLiabilities

3.33%

4.45%

6.09%

2.22%

MinorityInterest

0.00%

0.00%

0.00%

0.00%

TotalNonCurrentLiabilities

32.08%

36.94%

35.31%

21.11%

TotalLiabilities

54.38%

59.64%

55.94%

41.67%

Shareholder'sEquity

PreferredStockEquity

CommonStockEquity

45.62%

40.36%

43.91%

58.33%

Totalequity

45.62%

40.36%

43.91%

58.33%

TotalliabilitiesandStockEquity

100.00%

100.00%

100.00%

100.00%

DCMMOLDING

 Annual Income Statements (Value in

Millions)

2004%

2003%

2002%

2001%

Sales
CostofSales
GrossOperatingprofit

100.0
%
66.8%
33.2%

100.0
%
64.9%
35.1%

100.0
%
64.8%
35.2%

100.0
%
63.0%
37.0%

Selling,General&Admin.Expenses
EBITDA

17.2%
15.9%

18.7%
16.5%

19.6%
15.6%

22.2%
14.8%

Depreciation&Amortization
EBIT
OtherIncome,Net

4.6%
11.3%
0.0%

4.4%
12.1%
0.0%

4.3%
11.3%
0.1%

4.9%
10.0%
0.2%

TotalIncomeAvailforInterestExp.
InterestExpense
MinorityInterest
PreTaxIncome
IncomeTaxes

11.3%
2.4%
0.0%
8.9%
3.0%

12.1%
2.2%
0.0%
9.9%
3.7%

11.2%
2.1%
0.0%
9.1%
3.7%

9.7%
1.2%
0.0%
8.6%
3.5%

SpecialIncome/Charges

0.0%

0.0%

0.0%

0.0%

NetIncomefromCont.Operations

5.9%

6.2%

5.4%

5.3%

NetIncomefromDiscount.Operation

0.0%

0.0%

0.4%

0.0%

NetIncomefromTotalOperations

5.9%

6.2%

5.7%

5.3%

NormalizedIncome
ExtraordinaryIncome

5.9%
0.0%

6.2%
0.0%

5.4%
0.0%

5.3%
0.0%

IncomefromCum.EffofAcct.Chg.

0.0%

0.0%

0.0%

0.0%

IncomefromTaxLossCarryforward
OtherGains

0.0%
0.0%

0.0%
0.0%

0.0%
0.0%

0.0%
0.0%

TotalNetIncome

5.9%

6.2%

5.7%

5.3%

PLASTICHEMINCORPORATEDAnnualBalanceSheet

2004%

2003%

2002%

2001%

Cashandmarketablesecurities

1.2%

1.4%

1.5%

0.6%

Accountsreceivable

17.3%

17.3%

14.7%

21.0%

Inventory

10.3%

7.0%

7.4%

12.9%

OtherCurrentassets

1.5%

2.2%

2.0%

0.4%

TotalCurrentAssets

30.4%

27.9%

25.7%

34.9%

NonCurrentAssets
Property,Plant&Equipment,Gross

35.4%

28.7%

25.9%

48.0%

Accumulateddepreciation&Depletion

14.4%

9.1%

8.1%

19.4%

Property,Plant&Equipment,Net

21.0%

19.6%

17.7%

28.6%

Intangibles

45.7%

50.1%

53.5%

33.0%

OtherNonCurrentAssets

2.9%

2.4%

3.1%

3.5%

TotalNonCurrentAssets

69.6%

72.1%

74.3%

65.1%

ASSETS
CurrentAssets

TotalAssets

100.0%

100.0
%

100.0
%

100.0
%

LIABILITIESANDEQUITIES

CurrentLiabilities
Accountspayable

0.0%

0.0%

0.0%

0.0%

7.7%

6.9%

6.0%

9.8%

ShortTermDebt

2.48%

1.6%

1.0%

3.9%

OthercurrentLiabilities

13.17%
23.4%

9.8%

10.5%

13.0%

18.3%

17.6%

26.7%

Longtermdebt

81.0%

64.4%

65.4%

30.9%

DeferredIncomeTaxes

0.0%

0.0%

0.0%

0.0%

OtherNonCurrentLiabilities

1.1%

0.8%

0.0%

0.0%

MinorityInterest

0.0%

0.0%

0.0%

0.0%

TotalNonCurrentLiabilities

82.1%

65.2%

65.4%

30.9%

TotalLiabilities

105.5%

83.5%

82.9%

57.5%

0.0%

0.0%

0.0%

0.0%

Shareholder'sEquity

0.0%

0.0%

0.0%

0.0%

PreferredStockEquity

0.0%

0.0%

0.0%

0.0%

CommonStockEquity

5.5%

16.5%

17.1%

42.5%

Totalequity

5.5%

16.5%

17.1%

42.5%

TotalliabilitiesandStockEquity

100.0%

100.0
%

100.0
%

100.0
%

TotalCurrentliabilities
NonCurrentliabilities

PLASTICHEMINCORPORATED
Annual Income Statements (Value in
Millions)

2004

2003

2002

2001

100%
75%
25%
13%

100%
63%
37%
19%

100%
63%
37%
19%

100%
65%
35%
21%

Sales
CostofSales
GrossOperatingprofit
Selling,General&Admin.Expenses
EBITDA
Depreciation&Amortization

12%
6%

19%
6%

18%
6%

14%
4%

EBIT
OtherIncome,Net
TotalIncomeAvailforInterestExp.

6%
0%
17%

13%
0%
8%

12%
0%
12%

10%
0%
10%

InterestExpense
MinorityInterest
PreTaxIncome
IncomeTaxes

8%
0%
24%
0%
0%

7%
0%
1%
1%
0%

6%
0%
6%
3%
0%

4%
0%
6%
0%
0%

SpecialIncome/Charges

22%
0%

5%
0%

0%
0%

0%
0%

NetIncomefromCont.Operations

24%

1%

3%

6%

NetIncomefromDiscount.Operation

0%

0%

0%

0%

NetIncomefromTotalOperations

24%

1%

3%

6%

0%

0%

0%

0%

NormalizedIncome
ExtraordinaryIncome
IncomefromCum.EffofAcct.Chg.

2%
0%
0%

6%
0%
0%

3%
0%
0%

6%
0%
0%

IncomefromTaxLossCarryforward

0%

0%

0%

0%

OtherGains

0%

0%

2%

0%

0%

0%

0%

0%

TotalNetIncome

24%

1%

1%

6%

We can see that the cost of the sales has been increasing for both the companies. But, the cost of goods sold for DCM is less
that than of Plastichem. This indicates that DCM has been better at controlling their cost so they have a higher gross margin as
compare to Plastichem. This reduction in the gross profit has lead to the reduction on the expenses occur due to selling the
goods, but since DCM has a higher gross profit than Plastichem, they can also spend more in selling their goods. Plastichem
also has more debt compare to DCM, due to which they have a higher interest expenses compare to DCM.

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

A DuPont analysis helps us better understand the changes in return on equity (ROE). DuPont analysis tells us that three things
affect ROE: operating efficiency, asset use efficiency, and financial leverage. Therefore we break up ROE into its components:
ROE = Profit Margin (PM) * Total Asset Turnover (TAT) * Equity Multiplier (EM)

2004
Plastichem
DCM

2003
Plastichem
DCM

2002

ROE
=

PMX

TATX

EM

0.1777

-0.2407
0.0591

1.1174
1.3718

-18.3310
2.1922

ROE

PM

TAT

EM

0.0353
0.1866

0.0068
0.0619

0.8549
1.2166

6.0760
2.4774

ROE

PM

TAT

EM

Plastichem
DCM

2001
Plastichem
DCM

0.0638
0.1745

0.0147
0.0572

0.7424
1.3391

5.8621
2.2776

ROE

PM

TAT

EM

0.1730
0.1094

0.0565
0.0532

1.3008
1.2000

2.3555
1.7143

If we look at the figures we find that the reduction in ROE for Plastichem is mainly due to the drop in net profit margin.
Plastichem increased their use of debt, which resulted in a higher EM, but poor PM ensured the fall of ROE. For DCM, on the
other hand, we see that it has been fairly constant as well as ROE components.

4. What are some of the limitations regarding the various analyses that have been suggested above? What additional data
would Jay and Jack need to improve their findings? Are there any other calculations and comparisons that would be
helpful? Please explain.

Some of the limitations regarding the various financial analyses above are: Many companies near the year or quarter end
improve the appearance of their figures presenting them in the most attractive way possible. The miss misrepresentation of
numbers makes the analysis more difficult. The analysis may also be unclear by inflation as general price levels for goods
and services go up and subsequently purchasing power goes down, which makes comparison difficult over time. Many firms
also use different accounting methods which make comparing of different companies difficult for instance there are two
primary accounting methods used in USA, cash and accrual accounting. Cash accounting reports income and expenses are
reported in the year they are received and paid; accrual accounting reports income and expenses in the year they are
earned and incurred. Again making it very difficult to analyze different companies.
Some additional data Jay and Jack need in order to improve their finding would be to look into the companies accounting
practices and see if any off balance sheet items are present. From there they need to make sure the off balance sheet items
are converted to in the balance sheet items to have an appropriate comparison.

A statement of cash flows would also useful in analysis, as it would allow in determining the short-term viability of a
company, particularly its ability to pay bills. A statement of cash of cash flows also allows us to view cash and cash
equivalents coming in and out of company, giving better understanding as to where money is going and coming from. Also
although looking at numbers may allow analysis to quickly spot differences in financials, I believe you must research
companies in how they are run and if they are consistently making good business decisions.
5. After collecting, compiling, and analyzing the data, what conclusions and recommendations would Jack be justified in
making in his report to Andrew?

After collecting, compiling, and analyzing data we have come to conclusion that DCM Molding has shown a better financial
condition on average in the past four years, and Plastichem has barely met the acceptable average or is below the average
in the past four years. The Plastichem had a relatively high Debt-Equity Ratio, which indicated that was using many debts to
finance its growth. The high Debt-Equity Ratio also indicated that Plastichem bore more risk because the cost of debt
(interest) making things difficult. The cost of the sales for both the companies have increased. But, the cost of goods sold
for DCM is less that than Plastichem. This indicates that DCM has been better at controlling their cost so they have a higher
gross margin as compare to Plastichem. This reduction in the gross profit has lead to the reduction on the expenses occur
due to selling the goods, but since DCM has a higher gross profit than Plastichem they can also spend more in selling their
goods. So in comparison we see that DCM Molding is doing far better with its figures showing much better results than
Plastichem. Recommendation that Jack would be justified in making in his report to Andrew would be Plastichem needs to
increase profit margin after looking at the figures we find that the decrease in return on equity for Plastichem is mostly due
to the drop in net profit margin. Plastichem increased their use of debt that resulted in a higher equity multiplier, but poor
profit margin ensured the fall of return on equity. Plastichem had a relatively high Debt-Equity Ratio, which indicated that
Plastichem was using many debts to finance its growth.

6. In your opinion, how acute is the problem facing Plastichem, Inc.? What strategic moves do you think Andrew could
make to alleviate the problems?

It should be treated as a serious problem being that Plastichems main rival is rated as a strong buy while their stock is
rated as a hold. The strong drop in price will create fear for potential and current shareholders. If that fear continues,
Plastichems shareholders might sell their stock at a decreasing rate, causing more issues for the company. The CFO
should do a comparison between Plastichem and DCMs numbers, and find the strengths and weaknesses amongst his
company, in particular within its management teams. He should also begin finding ways to pay off Plastichems debt as well

as not accumulating anymore, being that Plastichem is already seen as risky. The CFO should also find a tighter way to
control the companys costs.

7. How accurate are the analysts in their recommendations of the two firms?

The analysts are very accurate in their recommendations to the two firms. DCM Molding figures showed far better results
and stock should rise; While Plastichem might consider selling stocks, if financial performance continues to worsen.