Solution Case Cosmin

Cosmin CASE – background information

Cosmin is a family owned and operated business specialized in the resale

of carpets for interior design. Every aspect of the business is operated,
controlled and handled by the family. The company makes their mission to
provide personalized exceptional service and quality products, at the most
affordable prices. From concept to completion, they work alongside with
their clients to guide them through a vast selection of products.

Cosmin was founded in 2013 to gain a significant market share. In 2016

the owner convinced a partner to invest 200 000 € in the firm in the form
of 2 000 preferred shares with a fixed dividend of 18 € per share. On
December 31st, 2018 the partner required and obtained from Cosmin a
share buy-back for 100 000 € (at par value).

In order to cover the financing needs, Cosmin negotiated during 2018 with
the bank a short term loan of 300 000 €.

To do:

Based on the balances sheets and the income statements, AND also on
the ratios indicated in the appendix, what do you think about Cosmin?

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Cosmin CASE – the balance sheet (1)

Assets 2018 2017

Land 20 000 20 000

Buildings 1 200 000 890 000

(-) Accumulated depreciation (-) 350 000 (-) 270 000

Equipment 701 000 628 000

(-) Accumulated depreciation (-) 371 000 (-) 278 000

Total non-current assets 1 200 000 990 000

Inventories 813 000 503 000

Receivables 723 000 398 000

Cash - 68 000

Total current assets 1 536 000 969 000

TOTAL ASSETS 2 736 000 1 959 000

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Cosmin CASE – the balance sheet (2)
Equity and Liabilities 2018 2017
Share capital 100 000 100 000
Preferred capital 100 000 200 000
Retained earnings 429 000 264 000
Equity 629 000 564 000
Overdraft 67 000 -
Suppliers 280 000 195 000
Short term bank loan 800 000 500 000
Short term part of mortgage 70 000 50 000
Short term part of financial lease 30 000 25 000
Total current liabilities 1 247 000 770 000
Mortgage 680 000 500 000
Financial lease 180 000 125 000
Total non-current liabilities 860 000 625 000
TOTAL EQUITY AND LIABILITIES 2 736 000 1 959 000

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Cosmin CASE – the INCOME STATEMENT

2018 2017

Sales 3 031 000 2 231 000

(-) Cost of goods sold 1 819 000 1 406 000

(=) Gross margin 1 212 000 825 000

(-) Selling expenses 480 000 200 000

(-) Administrative expenses 104 000 205 000

(-) Depreciation expense 173 000 127 000

(=) EBIT 455 000 293 000

(-) Interest expense 187 000 105 000

(=) Profit before taxes 268 000 188 000

(-) Income taxes 67 000 47 000

(=) Net profit 201 000 141 000

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Appendix : List of ratios to be calculated

• Performance ratios
Net profit margin
Return on equity
Return on assets
Asset turnover
Return on capital employed

• Equilibrium ratios
Capital structure
Long-term debt to equity
Current ratio
Quick ratio
Acid test

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SOLUTIONS
NET PROFIT MARGIN

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

Net income after tax 201/3 031 = 6,63% (6,32% for 2017)
Net profit margin (ROS) =
Sales

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RETURN ON EQUITY

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

Net income after tax 201/629 = 31,96% (25,00% for 2017)

ROE =
Equity

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RETURN ON ASSETS

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

Net income after tax 201/2 736 = 7,34% (7,20% for 2017)
ROA =
Total assets

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ASSET TURNOVER

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

Sales 3 031/2 736 = 1,11 (1,14% for 2017)

AT =
Total assets

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RETURN ON CAPITAL EMPLOYED

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
LT debt
= EBIT
Other non-current
(-) Interest
liabilities
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

EBIT 455/(680+180+70+30) = 47,39 %

ROCE = (41,86 % for 2017)
Equity + LT debt

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CAPITAL STRUCTURE

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets (-) Income tax
Current liabilities
= Net income

Liabilities 2 107/2 736 = 77,01 % (71,21 % for 2017)

CS =
Assets

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LONG-TERM DEBT TO EQUITY (LTDE)

Sales
Equity (-) Cost of sales
Non-current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Current assets Current portion of LTD (-) Income tax
Current liabilities = Net income

Long term debt 960/629 = 1,53 (1,24 for 2017)

LTDE =
Equity

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CURRENT RATIO (CR)

Sales
(-) Cost of sales
Equity = Gross profit
Non-current assets
(-) Other operating expenses
= EBIT
Non-current liabilities (-) Interest
= EBT
(-) Income tax
Current assets
Current liabilities = Net income

Current assets
CR = 1 536/1 247 = 1,23 (1,26 for 2017)
Current liabilities

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QUICK RATIO (QR)

Sales
Equity (-) Cost of sales
Non-current assets = Gross profit
(-) Other operating expenses
= EBIT
Non-current liabilities (-) Interest
Current assets
= EBT
Cash (-) Income tax
ST Investments Current liabilities
= Net income
Receiv. from clients

Cash + ST Investm. + Clients

QR = (0+723)/1 247 = 0,58 (0,61 for 2017)
Current liabilities

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ACID TEST (AT)

Sales
Equity (-) Cost of sales
Non-current assets = Gross profit
(-) Other operating expenses
= EBIT
Non-current liabilities
Current assets (-) Interest
= EBT
Cash (-) Income tax
ST Investments Current liabilities
Receiv. from clients = Net income

Cash
AT = 0/1 247 = 0 (0,09 for 2017)
Current liabilities

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 CASE COSMIN - RATIOS

2018 2017

Net profit margin 6,63 % 6,32 %

Return on Equity 31,96 % 25,00%

Return on Assets 7,34 % 7,20 %

Asset turnover 1,11 1,14

Return on capital employed 47,39 % 41,86 %

Capital structure 77,01 % 71,21 %

Long term debt to equity 1,53 1,24

Current ratio 1,23 1,26

Quick ratio 0,58 0,61

Acid test 0 0,09

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COSMIN CASE – CONCLUSION
General
- Rapidly growing company (+40% of assets, +36% of sales)
- Short term financing and uses important and growing (short term loan, overdraft,
inventories and receivables are growing faster than average)

Economic performance:
- Good and even improving during these 2 years (net profit margin 6,63% after 6,32%)
- Other ‘return’ ratios also good and improving

Financial position:
- Highly financed by debt and it’s getting worse (77% after 71%)
- Long term debt represents more than 150% of equity, that is a lot and significantly
increasing since the previous year (124%)
- Short term situation is quite dangerous:
- No cash anymore (only overdraft) – acid test 0% after 9% the previous year
- Quick ratio of 58% (after 61%) : significant risk to be not able to satisfy its short
term obligations

Very profitable business but running short of cash and therefore with high financial
risk. A mid- or long term solution is highly recommended (negotiation with bank or
other financial resources, …).

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