Simon Transportation Services filed for Chapter 11 bankruptcy in the early part of 2002. The company's balance sheet showed signs of strain almost two years prior. We are going to focus most of our attention on the 2000 part of the balance sheet to demonstrate that an intelligent investor could have seen warning signs before the company went under. Note: Since we are going to be focusing on 2000's numbers, we will not average in 2001's numbers to calculate inventory and receivable turn.
Cash Position
Simon had $3,331,119 in cash in September of 2000. It also had $3,437,120 in short term loans. This is the first sign the company was using borrowed money to operate. Almost all of the company's current assets are tied up in receivables, which is a real concern that customers may not be paying on time.
Working Capital
In 2000, the company had working capital of $15,970,104.
Working Capital per Dollar of Sales
In 2000, the company had total sales / revenues of $231,396,894. With working capital of $15,970,104, the company had a total Working Capital per Dollar of Sales percentage of 6.9%. Simon operates in the trucking industry, so most of its assets are fixed (in the form of diesels, trucks, semis, etc.)
Current Ratio
The current ratio should be at least 1.5 but probably not over 3 or 4. Simon had a current ratio of 1.631 in 2000. This is mediocre. The quick ratio will be a much better indication of the company's financial health.
Quick Ratio
The company's quick assets come out to around 1.487.
Inventory Turn & Average Age of Inventory
The company's inventory turn for 2000 only is 122.97 (meaning the company clears its inventory around every 3 days). In most situations, this would mean the company would have smaller working capital needs. However, if you look at the current assets, you notice they consist almost entirely of accounts receivable. Although the business sells its inventory frequently, it isn't converting those sales into cash immediately. Thus, the receivable turn is going to be very important to the success of this business.
Receivable Turn and Age of Receivables
Credit Sales are not carried individually. Thus, we will have to use the total sales / revenues of $231,396,894 with receivables of $34,265,075 in 2000. The receivable turn comes out to 6.75 times per year, or once every 54 days. So, although the company is clearing its inventory every 3 days, it is only getting paid every 54 days. Since the inventory turns aren't being converted to cash, the business needs more working capital. The 6% of working capital per dollar of sales we calculated earlier is dangerously low.
Debt to Equity Ratio
Combine Simon's short and long term debt, and you'll come up with $19,813,911. Divide the $44,844,132 in shareholder equity by this amount and you'll see that 44.18% of the company's equity is made up of debt. This would be acceptable if Simon enjoyed high enough return on equity to justify such a high borrowing level. A glance at the company's income statement shows that this is not the case; Simon lost money in 2000. Not only is the company not making money, it is losing money altogether. Common sense tells you that a business that is heavily in debt and is losing money probably isn't financially secure.A quick look into the company's 10k and 10q statements reveals that the short term loans are secured by the receivables. In plain English, if Simon Transportation fails to pay its short term loans on time, the bank can go to court and take control of the receivables. If this were to happen, the business may not have enough cash on hand to pay its long term debt, which makes up a sizable part of the balance sheet. If Simon ran into a bump in the road, it probably wouldn't be able to survive because of cash flow issues.
Final Thoughts
Here's what we've observed: In 2000, a full year before declaring bankruptcy, Simon Transportation had very little working capital, barely acceptable current and quick ratios, a high percentage of debt to equity, and inventory that was quickly sold but slowly collected for. The company may be able to survive as long as it doesn't run into any problems. An increase in fuel prices, a driver strike, or some other unfavorable event that increased losses would quicken the company's financial demise. An item of particular concern is found in the company's 10k, "The Company's top 5, 10, and 25 customers accounted for 24%, 39%, and 57% of revenue, respectively, during fiscal 2000. No single customer accounted for more than 10% of revenue during the fiscal year."According to these numbers, each of the top five customers accounted for nearly 5% of Simon's business. If just one of these switched to another trucking company, five percent of the business' revenues would have been lost. If the company had profitable with little or no debt, this would not be a concern. When you're counting on things going smoothly and you're playing with money that's not your own, you're almost always headed for disaster.
The bottom line: This is not a company you would invest in if you were looking for something long term and considerably safe.
Next page > Epilogue and Final Notes Before the Quiz > <<back, 29, 30, 31, 32, 33, 34, 35, 36, 37 >>
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.
| Simon Transportation Services, Inc. Consolidated Balance Sheet - September 30, 2001 | ||
| Current Assets | Sep 30, 2001 | Sep 30, 2000 |
| Cash & Equivalents | N/A | $3,331,119 |
| Short Term Investments | N/A | N/A |
| Receivables | $36,495,339 | $34,265,075 |
| Inventories | $1,302,067 | $1,330,462 |
| Pre-Paid Expenses | $2,528,675 | $2,325,199 |
| Total Current Assets | $40,326,081 | $41,251,855 |
| Long Term Assets | N/A | N/A |
| Property, Plant, & Equipment | $83,795,541 | $49,403,534 |
| Goodwill | N/A | N/A |
| Other Assets | $5,574,182 | $451,603 |
| Total Assets | $129,695,804 | $91,106,992 |
| Current Liabilities | ||
| Accounts Payable | $46,031,558 | $21,844,631 |
| Short Term Debt | $74,537,820 | $3,437,120 |
| Total Current Liabilities | $120,569,408 | $25,281,751 |
| Long-Term Liabilities | ||
| Long-Term Debt | $835,000,000 | $16,376,791 |
| Other Liabilities | $1,004,000,000 | $902,000,000 |
| Deferred Long Term Liability Charges | N/A | $4,604,318 |
| Total Liabilities | $120,569,408 | $46,262,860 |
| Shareholders' Equity | ||
| Preferred Stock | $5,195,434 | N/A |
| Common Stock | $62,917 | $62,877 |
| Retained Earnings | ($50,503,733) | ($2,451,176) |
| Treasury Stock | ($1,053,147) | ($1,053,147) |
| Capital Surplus | $51,865,007 | $48,285,578 |
| Other Stockholder Equity | $3,559,918 | |
| Total Stockholder Equity | $9,126,396 | $44,844,132 |
| Total Revenue | $278,818,242 | $231,396,894 |
| Cost of Goods Sold | $253,268,462 | $163,611,569 |
