Horizontal Analysis

Horizontal Analysis:

Horizontal Analysis is a procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration (Investopedia, 2012).

Income Statement

As noted in the description of the Company's results, the results for years 7 to 8 decreased substantially as opposed to the impressive increases from year 6 to 7. The percentage decreases were consistent within the revenue and expense areas which appear to be primarily variable. However, of concern is in relation to expenses which are more likely to have more of a fixed element, wherein it appears the Company made little effort to reduce costs in response to the reduction in revenue. There could a myriad of reasons ranging from an inability to affect much change; the trend realization may not have been identified quickly enough to a decision by management to not reduce expenses. As a publicly traded company, investors would likely want to know why management did not respond in a meaningful manner to such a dramatic revenue decline or at least provide a reasonable explanation. Publically traded companies have a fiduciary responsibility to provide investors with a sufficient return on their investment. Disclosure is required and lack of adequate disclosure and timely release of information is fraught with dangerous and expensive exposure.

When reviewing the income statement, Cost of Goods Sold is aggregated into one line item on the Comparative Income Statements given, yet this particular segment represents nearly 73% of the total Net Sales in both Year 8 and Year 7. Considering that this Company is in the business of manufacturing professional custom bikes, it is disconcerting to not have the cost of goods sold section available for review and analysis. Therefore, without a more detailed Cost of Goods, my executive summary will be deficient in its findings and conclusion.

The Company's strengths are inherent in the business model, as evidenced by a non-existent inventory turnover ratio. Competition Bikes, Inc. only produces the exact number of bikes ordered by a distributor so that there is no

When considering operating expenses, the results of the Horizontal Analysis between Years 7 to 8, Cash and Cash Equivalents Increase by 275.4 % while total Current Assets increase by 16.5%. One major hurdle in assessing the strengths and weaknesses of Competition Bikes, Inc. is that the Cost of Within this area are detailed expenses directly related to the cost of manufacturing a batch of bikes ordered by a distributor.

Balance Sheet

The Company has done an excellent job of strengthening its Balance Sheet. In response to the downturn in revenue, it has accumulated large balances of liquid assets. This allows for maneuverability and strength. On the other hand it can also increase attraction from large companies and venture capital firms which may be looking for acquisitions. Large balances of liquid assets are extremely attractive for hostile acquisitions, so there is some risk in this approach. Although the founder has 40% of the outstanding stock, a very attractive offer from a large company or venture capital firm could wrestle control away from the original founder.

The Company has done a good job of keeping inventory balances consistent; however accounts receivable balances increased substantially from year 6 to 7 and have remained high in year 8. This raises a cloud of suspicion on whether the distributors and ultimately down the line with the retailers are in financial trouble and may be unable to pay their bills. This could also have a negative impact on future sales if the distributors/retail outlets are in financial straits. The Company should have a sound plan in place to address the size and collectability of accounts receivable.

The Company has done an admirable job of paying down long term liabilities; however it appears to have done so as the expense of their suppliers as evidenced by the large increase in accounts payable and notes payable. Although this is a common credit/cash preservation tactic, it can have negative consequences if vendors are unhappy with payment trends and refuse to supply inventory until all past due invoices are paid. If the supply change is cutoff due to credit issues, this could have a dampening effect on future sales.

Vertical Analysis:

Vertical Analysis is a method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis are that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business (Investopedia, 2012).

Income Statement

Similar to our horizontal analysis, all the ratios associated with variable revenue and expense items have remained consistent from year to year regardless of whether revenue increased or decreased. Also, similar to the horizontal analysis, the fixed expenses increased dramatically from year 7 to 8. Of particular concern would be executive compensation. In the current economic climate, there is tremendous scrutiny by the public and regulators regarding executive compensation, particularly during times when revenue and net income are under stress. Company management may need to be prepared to explain executive compensation to shareholders. Compensation may be contractual and the expenses are what they are, however it is likely to be a hot topic at any shareholder meeting.

Trend Analysis:

Trend Analysis is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term (Investopedia, 2012).

Trends for years with actual results correspond with the information provided in the Company data. The forecasted trends seem somewhat optimistic. With the economy still sputtering and sponsorships declining, it seems unlikely revenues will increase. In addition, as a publicly traded entity, the Company may have to consider some extensive research in regards to their distributors and retailers. The dramatic increase and large accounts receivable balance is a flashing red light.