A. The background information presented on both companies shows that Boston Beer is the largest craft beer brewer in the United States, supplying a wide variety of high quality, full flavoured beer. Lions Brewery brews and bottles specialty beer, soft drinks and malta, which supplies a smaller market. Based on that information, the following could be expected: Operating decisions: Boston Beer would probably have more debtors and creditors than Lion Brewery. This is because of its larger client base. Also, Boston Beer would spend more on research, development advertising & promotion and sales to cover its large client base.
It would be expected that Lion Brewery would have a larger asset base than Boston Brewery being that it has a wider product base. Boston Beer specializes in Beer only, while Lion Brewery manufactures beer, soft drinks, malta etc. It is also expected that Boston Beer would have the additional cost of bottling, which would not affect Lions Brewery, being that Lion bottles its beverages while Boston Beer does not. Investment Activities: Lion Brewery would take part in more investment activities, being that it has a larger product line.
Lion would be expected to invest in more fixed assets (including bottling equipment) than Boston Beer. Financing: Lion Brewery would be expected to incur more long term debt, issue more stocks, and hence, pay more dividends. Income Statement: Boston beer would have a higher income than Lion Beer as Boston Beer only produces one product in a market that they would have known enough about in order to capitalize on sales. Expenses would also be higher for Boston Beer as they would have a larger sale force and administration expense. C) Based on the graphs presented, the following comparisons were drawn: The more profitable firm is Boston Beer. This is based on the fact that Boston Beer showed a higher profit margin than Lion Brewery as indicated below: Profit margin = net income / net sales.
Boston Beer 1996 Lion Brewery 1996 8, 385/191, 116 = 4. 39% 1, 007, 000/26, 439, 000 = 3. 81% Boston Beer 1995 Lion Brewery 1995 12, 574/151, 313 = 8. 31% 751, 000/24, 793, 000 = 3. 03% The profit margin measures net income produced by each dollar of sales.
Therefore, for each dollar of sale, Boston Beer generates $4. 39 in profit, while Lion Brewery generates $3. 81 in 1996. Boston Beer also uses its assets more efficiently to produce sales than Lion Brewery, as seen in the calculation of Asset turnover shown below: Asset Turnover = Net sales /average total assets: Boston Beer 1996 Lion Brewery 1996 191, 116/ (96, 553+ 76, 690) /2 26, 439, 000/ (15, 954, 000+14, 441, 000) /2 = 191, 116/86, 622 = 2. 21 times = 26, 439, 000/15, 197, 500 = 1. 74 times Boston Beer produces $2.
21 in sales for each $1. 00 invested in average total assets, while Lion Brewery produces $1. 74 in sales for each $1. 00 invested in assets. Overall, according to the return on asset ratio computed, Boston Beer's overall earning power and profitability surpasses that of Lion brewery. Return on asset = Net income / Average total assets Boston Beer 1996 Lion Brewery 1996 8, 385/86, 621.
5 = 9. 68% 1, 096, 000/ 15, 197, 500 = 7. 21% According the current and quick ratios calculated below, both companies would be able to meet their short term debt as they become due, being that both ratios are positive. In the short term, as the quick ratio suggests, Boston Beer is more liquid than Lion Brewery, and thus, are better able to pay long term debt. Overall, both companies in 1996 are able to meet their debts when they become due, but Lion Brewery is in a better position to do so than Boston Beer. Current Ratio: current assets / current liability Boston Beer 1996 Lion Brewery 1996 77, 691/29, 922 = 2.
59 times 6, 311, 000/2, 885, 000 = 2. 19 times Boston Beer 1995 Lion Brewery 1995 65, 283/20, 017 = 3. 26 times 4, 756, 000/4, 702, 000 = 1. 01 times Quick ratio: (cash+ marketable securities+ receivables) / current liabilities Boston Beer 1996 Lion Brewery 1996 (5, 060+ 35926+ 18109) /29, 922 (1, 992, 000+ 2, 001, 000) /2, 885, 000 = 1. 97 times = 1.
38% Boston Beer 1995 Lion Brewery 1995 (1, 877+34, 730+16, 265) /20, 017 2, 476, 000/4, 702, 000 = 2. 64 times = 0. 53 times Debt to equity ratio = Total liabilities/ stockholders' equity Boston Beer 1996 Lion Brewery 1996 31, 722/64, 831 = 0. 49 times 3, 334, 000/12, 620, 000 = 0.
26 times Boston Beer 1995 Lion Brewery 1995 21, 892/54, 798 = 0. 40 times 11, 402, 000/2, 317, 000 = 4. 92 times In 1995, Lion Brewery was heavily indebted to creditors compared to stockholders. However, in 1996 they issued common stock, the funds from which was used to clear their long term debt, and significantly reduce their debt to equity ratio.
There are a number of 'off balance sheet items' that would indeed affect the cash flow of each company. One such item is litigation charges filed against Boston Beer in 1996. Although management states that settlement of this law suit filed against the company will not materially affect the financial position of the company, a provision for this has to be made on the balance sheet. Lion Brewery is also involved in legal proceedings, for which a provision should be made on the balance sheet.
Another 'off balance sheet charge' was the fact that total deposits as indicated in the notes to the financial statements for Boston Beer were not included in the Income Statements. This would have an effect on the cash flow if this liability was excluded for all three years. Another expense not noted on the balance sheet (with regards to Boston Beer - note O) is the subsequent event mentioned. The company has acquired fixed assets, and plans to purchase real estate.
This has not been included in the balance sheet, as no prices have been determined, but it would indeed constrain future cash flows. The differences described in part A turned out to be incorrect, as it was assumed that based on its diversity, Lion Brewery would be more straddled with debt than Boston Beer. On the contrary, Boston Beer, though more liquid, is more dependent on creditors than Lion Brewery. Also, after examining the notes to the financial statements for Boston Beer, it became obvious that they, too, brew and bottle their beer, so the extra charges for bottling suggested in part A would be null and void.
D) Cash Flow yield: Net cash flow from operating activities / net income Lion Brewery 1996 Boston Beer 1996 2689000/ 1096000 = 2. 45 times 15, 763/ 8385 = 1. 88 times Lion Brewery 1995 Boston Beer 1995 2475000/1051000 = 2. 35 times 2440/12574 = 0. 19 times Cash Flow to sales = Net cash flow from operating activities/ net sales Lion Brewery 1996 Boston Beer 1996 2689000/ 26439000 = 10. 2% 15, 763/ 191116 = 8.
25% Lion Brewery 1995 Boston Beer 1995 2475000/24793000 = 9. 98% 2440/151313 = 1. 61% Cash flow to assets = Net cash flow from operating activities/ average total assets Lion Brewery 1996 Boston Beer 1996 2689000/ 15198000 = 17. 69% 15, 763/ 86, 622 = 18. 19% Free cash flow: Net cash flow from operating activities-dividends+ sale of assets -purchases of assets Lion Brewery 1996 Boston Beer 1996 2689000-0+0-908000 15, 763, 000-0+0-11359000 = $1, 781, 000 = $4, 404, 000 Lion Brewery 1995 Boston Beer 1995$ 2475000-0+12000-319000 2440000-0+0-4268000 = $2, 168, 000 = -$1828000 (cash deficiency in 1995) Lion Brewery: In both 1995 and 1996, Lion Brewery's cash flow from operating activities was a source of cash, in that their cash flow was positive. A positive cash flow shows that the company is generating more cash than it is using.
Boston Beer: In 1996, Boston Beer enjoyed positive cash flow, showing that its cash flow from operating activities was a source of cash as opposed to a use of cash. However, in 1995, they experienced negative cash flow, which indicates that in this year their cash flows from operating expenses were a use, rather than a source of cash. Boston Beer's Operation and Investing activities are primarily financed by proceeds from stock option plans and proceeds from sales under stock purchase plans. Lion brewery generated a significant amount of cash from sale of stock. The major difference between the two companies is the fact that Lion Brewery depends heavily on financing from investors, while Boston Beer depends on creditors. Lion Brewery appears to be a more conservative company than Boston Beer.
They do not take as much risk as Boston Beer, which may explain its lower return. E) Based on the information presented, Boston Beer appears to be at greater future risk than Lion Brewery. Boston Beer is reliant on debt, and is therefore more exposed to risk. In determining the company with the greater potential to increase its owners' wealth, the price / earnings (P/E) ratio was computed. The P/E ratio measures investor confidence in the company, and is the ratio of the market price per share to the earnings per share. The P/E ratios for both companies are shown below: Price / earnings ratio = Market Price per share/ earnings per share Lion Brewery 1995 Boston Beer 1995 = 6/0.
36 = 15/0. 41 = 16. 67 = 36. 59 times A stock with a lower P/E ratio gives the investor more earnings per dollar invested. Therefore, Lion Brewery's lower rate shows that they are better able to increase stockholders' wealth than Boston Beer. However, Boston Beer's higher P/E ratio indicates that investors have more confidence in the earning potential of that company than Lion Brewery.
The earnings per share for Lion Brewery has decreased (as per the return on equity previously calculated), implying that the company's stock is not as valuable as it used to be. However, it must be considered that Lion Brewery has no long term debts to pay off, so their earning power should be greater than that of Boston Beer. Also, we must consider the fact that the earnings per share may have fallen because the income was used to pay off the long term debt. This repayment of debt is not expected to reoccur, and so it is likely that the earnings per share should increase in 1997 and beyond. Therefore, it can be assumed that Lion Brewery future operations should generate more wealth for its investors. Notwithstanding the above, Boston Beer's earning remain of a higher quality and is more persistent than that of Lion Brewery.
F) As potential investors, it may be worth our while to seek further information on Lion Brewery. It is not a company comparable in magnitude with Boston Beer, but it appears to have great potential for future earnings. We would be interested in learning the market price per share for years following 1995, so as to analyze whether or not the company's current investors have increased confidence in its earning potential. This would further motivate potential investors to seek information about this company. Further, we would be interested in finding out for how long the company expects to postpone payments of dividends. Nonpayment of dividends indicates that the company expects market value of the stock to increase.
However we would like to know when this expected increase will bear fruit. We would also be interested in the long term plans of the company, whether they plan to invest in fixed assets such as plants and machinery, which would increase debt and affect debt to equity ratio, and long term solvency of the company. We would also be interested in finding out how Lion Brewery planned to finance future investments - whether they planned to seek more long term debt or continue to issue stock. It is worth considering whether Lion Brewery planned to expand its operations to involve a wider cross section of the market. nb: figures presented with respect to Boston Beer is in thousands.