FM 4-1 , Drachuk A., Ovinova E., Lebedeva J.

This summary paper contents the analysis of Coleco Industries, INC. opportunities to avoid its bankruptcy and further acquisition by Hasbro in the end of 1980s.

Coleco Industries was the fifth-largest toy manufacturer in the United States. Some of Coleco’s well-known products include Cabbage Patch Kids, plush Alf dolls, Potato Pals and play sets based on popular TV series.

Conducting ratio analysis will help focus more on Coleco’s underlying strengths and weaknesses.

Exhibit 1. Screening Ratios

	1980	1981	1982	1983	1984	1985	1986	1987
Sales/Accounts Receivable	11,834	8,383	4,734	3,775	3,749	7,736	3,100	2,565
Sales/Inventory	5,442	4,176	7,381	3,623	8,961	19,080	6,365	7,475
Declining Asset Turnover (Sales/Assets)	2,056	1,791	1,785	1,249	1,992	1,952	0,847	0,942

The Sales/Accounts Receivables number is decreasing meaning that accounts receivable are getting larger. So, Coleco is collecting their accounts receivable slower from year to year.

Sales/Inventory is on an upward trend with strong fluctuations during the 80s, As a general rule, the higher the inventory turnover ratio, the more efficient the operation, but extremely high number in 1985 indicates that the firm might be unable to fulfill large and sudden orders, and will missing sales in some instances. This scenario’s illustrated by sales decreasing in 1986.

The Declining Asset Turnover is steadily decreasing which indicates that the assets are used without resulting in sales’ growth.

Exhibit 2. Growth Ratios, y-t-y percentage changes

	1980-1981	1981-1982	1982-1983	1983-1984	1984-1985	1985-1986	1986-1987
Accounts Recievable	54,26%	407,64%	46,58%	30,81%	-51,47%	60,98%	21,80%
Sales	9,28%	186,68%	16,87%	29,90%	0,15%	-35,48%	0,76%
Inventories	42,41%	62,21%	138,13%	-47,48%	-52,97%	93,41%	-14,21%

The current ratio shows negative evaluation because of a greater increase in current liabilities compared to a slight increase in current assets, thus forcing the firm to decrease its liquidity. Through the quick asset ratio we found that the company is in bad standing with credit. The negative accounts receivable turnover shows the company is unable to turnover its sales on credit faster to gain more liquidity. With a positive increase in inventory turnover and negative accounts receivable turnover, the company hasn’t been able to use its working capital growth.

Exhibit 3. Financial Analysis (1/2)

	1980	1981	1982	1983	1984	1985	1986	1987	8 Yr. AVG
Liquidity
Current Ratio	2,669	2,212	2,068	1,360	1,333	2,583	1,368	1,075	1,834
Quick Ratio	1,296	0,957	1,498	0,810	0,979	2,240	1,094	0,859	1,217
Cash (in thousands)	11 765	7 749	52 474	5 931	1 506	110 734	82 483	34 633	38 409,375
Cash as a % of C.A.	20,21%	10,32%	20,91%	1,46%	0,46%	36,23%	20,96%	10,34%	0,151
NWC (in thousands)	36 394	41 164	129 607	107 777	81 310	187 318	105 757	23 430	89 094,625
NWC less Cash	24 629	33 415	77 133	101 846	79 804	76 584	23 274	-11 203	50 685,250
Working Capital Turnover	4,476	4,325	3,938	5,535	9,530	4,143	4,734	21,531	7,276
WC less Cash Turnover	6,614	5,328	6,617	5,857	9,710	10,133	21,511	x	8,221
Profitability
Net Profit Margin	8,00%	4,33%	8,80%	-1,25%	-10,30%	8,28%	-22,22%	-20,88%	-3,16%
Operating Margin	16,43%	10,07%	18,64%	-0,88%	8,85%	15,37%	-14,96%	-9,08%	5,56%
Gross Margin	40,09%	35,31%	45,17%	32,31%	34,87%	47,49%	35,97%	35,47%	38,34%
ROA	16,46%	7,76%	15,71%	-1,56%	-20,52%	16,15%	-18,81%	-19,67%	-0,56%
ROE	33,27%	16,24%	48,46%	-8,31%	-760,03%	62,74%	1451,58%	125,01%	121,12%
ROIC	27,93%	13,09%	38,81%	-2,17%	-31,36%	36,84%	-32,05%	-30,84%	2,53%
Tax Rate	43,57%	42,73%	47,46%	70,09%	10,50%	30,81%	5,42%	0,00%	31,32%

Coleco has consistently declined its net income and operating margins. However, gross margins have remained at pretty constant rate, which indicates that company’s making profit after paying off its Cost of Goods sold despite declining in Sales. Hence, the reasons of slackening Coleco’s financial position are enormous growth of Selling, General & Administrative Expense (333,56%) and increasing degree of dependency of the company on borrowings (up to 309,69% change on Interest Expense by 1987 above the same position in 1980) against sales only three times sales growth. In addition, Coleco suffered a huge loss in 1984 caused by disposition of ADAM.

Overall, in terms of profitability despite ROA’s strong performance early in the observed period, it has failed to maintain positive value till the end of period (except 1985). The extraordinary values of ROE in 1984, 1986 and 1987 are explained by low level and negative values of total equity in pointed years. To avoid such distortions return on equity would be calculated below. The decrease of return on invested capital through the period shows inefficiency at allocating the capital giving a sense that Coleco’s using money without generation returns.

Probably, one of the Coleco weakness’ drivers might be a high Tax Rate aggravating the decrease by cutting the net income margin till the end of 1984.

Coleco has a negative asset management analysis, with slowdown of all turnover ratios. The decrease in account receivable (growth of Average Collection Period) turnover is the most negative factor in the liquidity evaluation. The lack of free cash for covering liabilities causes delays in payoff with the creditors’ bills. Hence, the total value of long-term debts increases through the period. Growth of company’s dependency on borrowings’ illustrated by Liabilities-to-Equity enlargement till the negative values in 1986 and 1987. So, Coleco has increased its reliance on debt as a form of financing over the period. This resulted in pressure on stock price and reduction of refinancing opportunities. Additionally, Coleco also manages to pay off its debts. With decrease in operating profit it cuts the times interest rate, and causes further growth of liabilities. By the primary part of long-term debts in the capital structure growth of net working capital doesn’t result in net income increase.