Saputo Inc. is a Canadian company that produces, markets, and distributes a variety of products including cheese, milk, yogurt, and snack-cakes. It is the largest dairy processor in Canada, one of the top three cheese producers in the United States, and the largest snack-cake manufacturer in Canada. Its head office is in St-Leonard, Quebec. Its 2011 and 2010 balance sheets and income statements follow.
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Assume the common shares represent 203,830 (thousand) shares issued and outstanding for the entire year ended March 31, 2011.
Required
1. Prepare a common-size balance sheet and income statement on a comparative basis for 2011 and 2010. Identify any significant changes from 2010 to 2011. Round calculations to two decimal places.
2. Calculate the 2011 ratios for Saputo by completing the schedule below, including a comparison against the industry averages in Exhibit 18.11. Round calculations to two decimal places.
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Analysis Component: Saputo’s management maintains a strong balance sheet as part of meeting the requirement for a high return on total assets. Explain how a strategy for keeping a strong balance sheet helps high maintain the desired return on total assets.
SOLUTION:
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Part 1
Saputo Inc. Common-Size Comparative Balance Sheet As at March 31, 2011 and March 31, 2010
2011 %
2010 %
Assets
Current assets
Cash and cash equivalents
2.11
1.68
Receivables
12.58
11.28
Inventories
18.07
17.42
Prepaid expenses and other assets
1.39
0.91
Portfolio investment
0.76
0.00
Other current assets
0.90
0.87
Total current assets
35.81
32.16
Portfolio investment
0.00
1.27
Fixed assets
28.03
31.93
Goodwill
23.14
22.03
Trademarks and other intangibles
9.25
9.73
Other assets
3.77
2.88
Total assets
100.00
100.00
Liabilities
Current liabilities
Bank loans
4.66
1.89
Accounts payable and accrued liabilities
15.66
14.48
Income taxes payable
5.42
4.59
Other current liabilities
0.77
0.27
Total current liabilities
26.50
21.23
Long-term debt
10.33
11.70
Other liabilities
5.16
4.71
Total liabilities
41.99
37.65
Equity
Common shares
16.86
17.97
Retained earnings
47.07
49.28
Other equity items
(5.92)
(4.90)
Total equity
58.01
62.35
Total liabilities and equity
100.00
100.00
Saputo Inc. Common-Size Comparative Income Statement Years ended March 31, 2011 and March 31, 2010
2011 %
2010 %
Revenues
100
100
Cost of sales and selling, general and administrative
86.89
88.09
Depreciation and amortization
1.74
1.95
Operating income
11.37
9.96
Interest on long-term debt
0.39
0.52**
Other expenses
0.23*
0.09
Income before income taxes
10.75
9.35
Income taxes
3.26
2.76*
Net income
7.49
6.59
*Rounded down to ensure values added appropriately.
**Rounded up to ensure values added appropriately.
The common-size statements do not reveal any significant changes from 2010 to 2011 other than an increase in bank loans on the balance sheet and cost of sales and selling, general and administrative expenses decreased and net income increased.
Part 2
Ratio
Calculation
Favourable (F) or Unfavourable (U)
Current ratio
= $1,312,098,000/$971,205,000 = 1.35:1
U (Industry = 1.6:1)
Total asset turnover
= $6,025,470,000/[($3,664,309,000 + $3,253,451,000)/2] = 1.74 times
U (Industry = 2.3 times)
Debt ratio
= ($1,538,668,000/$3,664,309,000) × 100 = 41.99%
U (Industry = 35%)
Equity ratio
= 100 – Debt ratio = 58.01% OR ($2,125,641,000/$3,664,309,000) × 100
The numerator of the return on total asset ratio is net income. Therefore, the higher the net income, the higher the return on total assets will be. A strong balance sheet means less debt. The less debt there is, the lower the interest costs will be. The lower expenses are, the greater net income will be. So, by keeping debt low, net income is higher than if debt was higher.