O.M Scott and Son Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Subject:Financial Analysis for credit approval of O.M Scott

The purpose of this memo is to assess the financial and credit worthiness of the O.M Scott for the grant of credit facility. Through assessment of financials based on certain assumption an idea can be generate whether a loan facility should be extended, approved or not.

O.M Scott financials has been estimated based on five years average, estimated income statement depict that if O.M Scott continue to borrow aggressively then it will make loss rather than profits as cost of goods sold will increases due to interest cost.

For the years 1962 and 1963, estimated financial statement depict that although sales increases by an estimated average rate of 7.81% but cost of goods sold also increases mainly due to increase in depreciation and interest cost, which overall increases the COGS and convert profit into loss.

In year 1962, Net loss is estimated to be $384.542 which is expected to reach $3,950.369 in 1963 year. Covenants such as Scott IBT which must be exceed or equal to 1.5 times might not be fulfilled due to estimated losses.

Scott balance sheet shows that if long term debt is increase by an average amount of past five years and in next two years (estimated) long term debt is expected to increase from $12 Million to $24 Million. This indicates that long term debt is projected to get double in one year that is $24Million while, in next year $24 Million of debt is expected to increase to $50 Million and an estimated average interest rate of 9% is paid. This assumption will contributes to increase in COGS that turns profit into losses.

By focusing on the assumption that if debt is double then there should be enough assets to pledge in case of Scott liquidation .In year 1961 (e) it can be concluded that total assets available to Scot was $35.740 Million against the total liabilities of $24.130 Million. Bank often mortgages on fixed assets whereas, current assets are excluded from it.

Non- current asset including depreciation available in year 1961(e) was $6.123 Million and if it is estimated that it will increases on average at the rate of 62% then in year 1962 it will increases to 9.921 million while, in year 1963 it is expected to increases to $16.075 Million. Another reason for increase in COGS is depreciation and amortization expenses and also asset base that is double in last two years as per assumption.

Another financials which should be asses is the cash and liquidity, even if company is assumed to in loss but if it is liquid enough to support its activities then a turnaround decision can be made.

Scott cash and cash equivalents in year 1961 is estimated to be $1.454 million which if grown at estimated rate of 42% will reach up to $2.935 Million. Details of cash flow can be estimated using the cash flow statement.

Scot is using prebilling system in order to recognize revenue, as per international reporting standards it is not always the case that revenue should be recognized before or after receipt of cash. There are certain predefined criteria which company have to recognize revenue in order to limit companies to inflate their revenues. Criteria includes such as significant profit and loss should be transferred, economic benefit flow to the entity and cost can be determined. If all such conditions are fulfilled then revenue should be recognized.

O.M Scott and Son Case Solution

Scott internal control means achieving the organization objectives with operational effectiveness and efficiency. Scott internal control also ensure proper reporting and compliance. Trends in dealer’s inventory can be assess using the trends in the past financials. Increase and decrease in the inventory can be assess and prices can be estimated as well.

Stock market signal includes what company announces and what market participant access. If current estimations are present in the financials then it is expected that stock price fall.However, fall in the stock price is due to loss in next two years.

Change in accounting practices such as change in accounting estimates and accounting policies will have significant impact on the financials, any major change will have significant impact on the financials.

Recommendation

Based on detailed analysis of financials statement which consist of fore casted income statement and fore casted balance sheet and non-financial data. It is recommend that we should not become one of the Scots lender as company will aggressively increase its debt which will have a significant impact on the income statement. There are no other source of income Scott rely on only one source.............

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