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This further reduced to $549 million in 2012. The reason behind this decrease is was a subsequent decrease in revenues and reduced nerd sales. The cost of selling goods is proportional to the revenues and an increase in latter directly impact the former. No direct inference could be made from COSG statistics.
Gross profit: Gross profit of Callaway Golf Company peaked in FY 2009 when it was recorded to be $365.5 million whereas in 2008, it was reported to be $349 million. In FY 2010, the gross profit of the company was $312 million that dropped to $284 million in FY 2012. This indicates that in FY 2013, the gross profit of the firm may remain equaling to the 2012 mark. Reduction in net sales of the company during these years impacted other aspects of company's financial performance. The company has gradually got its gross profitability reduced due to reasons not explicitly stated in company's financial statements. Weak economic conditions are indirectly held responsible for decreased sales and profits.
Earnings before tax (EBT): Callaway's financial statistics regarding EBT indicate that there was a sharp decline in EBT in the year 2012. $-29.6 million were the EBT of Callaway Golf Company reported in 2009 whereas this got reduced to $-35.6 million for the year 2010. In the following two years, 2011 and 2012, the EBT was reported to be $-90.3 million and $-118 million (Business Week, 2013). The following table displays these statistics.
Earnings Before Tax (EBT)
In a similar case study, the negative EBT displayed that the company ultimately got liquidated and did not continue operating. Fig 1 shows the EBT of Alitalia, Italy's former flag carrier airline (Beria, Niemeier & Frohlich, 2011). Fig 1
Source: (Beria, Niemeier & Frohlich, 2011)
This implies that the managers of the company may have to resort to short-term measures for making the company accounts attractive enough for potential buyers of the company for making a reasonable bid. Although Callaway's 2013 financial indicators are better as compared to the previous years after 2008 but considering the fact the 2008-2012 are being assessed for analyzing the company performance, performance of the company was not found satisfactory. Over production is also an issue when corporate managers have to show that COSG has been controlled and brought down. Roychowdhury (2006) argued that companies have persistent negative EBT may use real activities to manipulate earnings. Some firms may reduce the discretionary funds to improve the reported earnings as well. Such practices are usually executed prior to the start of due-diligence process for acquisition of the company. To mitigate such threat of any deliberate intervention made by Callaway's management, the acquiring firm should effectively conduct a financial audit whereby financial statements shall be reviewed and any abrupt earnings shall be taken into consideration. Goldstein, Ju and Leland (2001) argued that in order to correctly assess the debt and profitability of firm, variable costs shall be subtracted from revenues of the firm. If the variable costs are under reasonable limits, the company' negative EBIT may not be the only criteria to assess the financial health of the company.
Analysis of Callaway Golf Company financial statements and other documents indicate that despite having differentiated products and an elaborate network of distribution through retail stores and company owned network of supply, the company was not able to maintain appropriate level of gross margin above 25% of the net sales made by the company. Earnings before taxation were also below industry average and negative EBT was reported during all the four years of assessed financial data. The company does have loyal customer base but could not maintain a level of profitability that would have been desirable for the acquiring entity to commit upfront capital for acquisition and restructuring of the company.
Recommendation: It I s hereby recommended that acquiring firm shall wait for another one fiscal year before the long-term trend of Callaway's financial and fiscal performance is established. Since 2009, the company has reported negative EBT and decreasing net sales. On the other hand, Q1 and Q2 earnings and other financial indicators show that company has started regaining its position in the industry by increasing its sales and gross profits. In order to make a carefully developed decision, the acquiring firm shall observe financial performance of Callaway and assess the potential improvement at year end. Committing huge capital an acquiring Callaway Golf Company may pose risk for the long-term growth of the company.
Beria, P., Niemeier, H.M., & Frohlich, K. (2011). Alitalia -- the failure of a national carrier. Journal of Air Transport Management, 17(4), 215-220.
Bloomberg. (2013). Callaway Golf Company (ELY:New York). Bloomberg BusinessWeek. Retrieved from: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=ELY
Callaway. (2013). Corporate Governance. Retrieved from: http://www.callawaygolf.com/global/en-us/investor-relations/corporate-governance.html
Goldstein, R., Ju, N., & Leland, H. (2001). An EBIT-Based Model of Dynamic Capital Structure*. The Journal of Business, 74(4), 483-512.
Haunschild, P.R. (1994). How much is that company worth? Inter-organizational…[continue]
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The start-up is a disaster for a boutique firm which has an "investment process that develops ideas and concepts" (Katz, L. et al., 2005). Beta would play a huge role in the marketing, distribution, and branding of this new firm, and even with "the recruitment of a management team with significant experience in the golf industry" (Katz, L. et al., 2005) the risk of misdirection and misallocation of capital are