MBAC 6060 – Spring 2015

Burrito Joint Case One (1) Answers

Part 1

  1. COGS decreased but it is still higher than BURGERHAVEN. (Maybe more expensive ingredients.)
  1. BURRITOJOINT has more cash and less A/R. The cash makes up the majority of BURRITOJOINT’s Current Assets. Since is a relatively new company and is growing and does not pay dividends, it has (most likely) acquired its cash through retained earnings and not through borrowing and therefore does not have offsetting short-term liability.

BURRITOJOINT holds less PPE than BURGERHAVEN, although this comparison is skewed because of BURRITOJOINTs cash holdings.

  1. BURRITOJOINTs liability mix and debt-equity mix did not change substantially between 2008 and 2009.

BURRITOJOINT holds significantly less debt than BURGERHAVEN.

  1. BURRITOJOINT’s Days’ Sales in Inventory increased slightly from 2008 to 2009.

BURRITOJOINT holds less inventory than BURGERHAVEN and therefore must have more frequent deliveries.

Increase BURRITOJOINT’s inventory to BURGERHAVEN’s level: 2.78/1.80 = 1.55

Multiply BURRITOJOINT’s inventory by 0.55 to get inventory increase  0.55 x $5,614 = $3,062

Increased interest expense = $3,062,000 x 0.03 = $91,864

Note that if you type BURRITOJOINT’s new inventory level of $5,614 + $3,062 = $8,676 into cell C26, Days’ Sales in Inventory in cell C56 changes to 2.78.

  1. Quick remove inventory. The denominator is money available if the company sells no more products.

Cash removes A/R.The denominator is money available if the company sells no more products and collects no receivables.

Since BURRITOJOINT holds more cash and less inventory and A/R than BURGERHAVEN, all the ratios are higher and the difference between them for BURRITOJOINT is smaller. Therefore BURRITOJOINT is more likely to meet its short-term obligations.

  1. Price-to-Sales removes no expenses form the denominator.

Price-to-EBITDA removes COGS, SG&A and Other Expenses from the denominator.

Price-to-Earnings removes all expenses from the denominator.

Market-to-Book compares the price of the stock to the book liquidation value of equity.

BURRITOJOINT has a lower Price-to-Sales ratio but higher Price-to-EBITDA and Price-to-Earnings ratios than BURGERHAVEN. The difference is due to the BURGERHAVEN’s lower relative expenses, thus higher denominator (EBITDA & Earnings).

  1. BURRITOJOINT’s profitability (ROE) increased from 2008 to 2009. Higher leverage (EM) and expense efficiency (PM) dominated lower sales efficiency (AT).

BURGERHAVEN was more profitable (higher ROE). BURGERHAVEN is more levered (EM) and generated less sales from assets (AT) but also incurred less expenses relative to sales (PM). Recommend BURRITOJOINT work to control expenses to bring PM in line with BURGERHAVEN – but this recommendation may change with the analysis in the next paragraph.

COGS seems to be driving the result. Lower COGS may not be consistent with BURRITOJOINT’s mission to provide better quality food than its competitors.

  1. Growing at the internal growth rate decreases the D/E ratio since equity, through RE, increases and debt stays constant.

Growing at the sustainable growth rate by definition keeps the D/E ratio constant since increases in equity are matched by selling enough debt to keep D/E constant.

  1. BURRITOJOINT’s NOPAT increased from 2008 to 2009 driven by lower CGS year-over-year. Its short term and long term capital to operate the business also increase, reflected in the jump in cash for NOWC and increase in PPE in conjunction with its expansion, driving a ROIC increase from 13.42% to 18.08% in 2009. FCF’s for 2009 were $28,753, with identifiable uses of after-tax-interest of $312.35 and repurchase of common stock of $45,974. The FCF uses are not dollar-for-dollar identifiable to the 2009 FCF total of $28,753 due to the consolidated financial statements not reflecting all account activity including S/T investments and debt breakout needed for entire breakout of FCF uses.