Shisha Wasabi Financial Statements Determine

Shisha WASABI Financial Statements

Determine if an investment of $500,000 in Shisa Wasabi is Viable

Major Issue to Be Addressed

The opportunity exists to invest $500,00 in Shisa Wasabi Corporation. An analysis of their financial statements and current economic condition has been completed and is included in this document. In the interest of evaluating its fiscal long-term value, the profit margin, Return on Assets and Return on Equity are used as the basis of these recommendations.

Based on significant reductions across the three key financial ratios of gross margin, Return on Assets and Return on Equity between the years 2008 and 2009, the recommendation is made to not invest $500,000 in Shisa Wasabi Company. Taken together these financial ratios indicate the company is finding higher margin and more profitable sales more elusive to capture, and the impact is lower productivity and efficiency throughout their organization. While this may be an aberration the depth of the drop in gross margin is 20% (8.85% in 2008 versus 7.03% in 2009) is very significant and cause for concern. Additional analysis and evaluation of their pricing and go-to-market strategies are necessary to fully analyze a 20% drop in gross margin in just twelve months. It is however cause for concern and signals the company most like is encountering more entrenched, price-driven competitors who may have already started a price war in key segments. A reduction this drastic in gross margin could also signal their supply chains are charging an exceptionally higher level of prices to them, squeezing their margins as a result. Operating expense have increased 15% year-of-year from $7,29M to $8.4M, and this has also acted to deplete gross margins. With the significant increase in operating expenses and reduction in margins, it is reasonable to assume profitability will gradually become more elusive for Shisa Wasabi.

Gross Margin Calculations

Net Profit Margin

Calculation

2009

Calculation

2008

Net Income

Sales

2,100 / 30,000

=.0703 = 7.03%

7.03%

2,390 / 27,000

= .0885 = 8.85%

8.85%

The next ratio used in the analysis is Return on Assets. This ratio also shows significant reduction year-over-year from $14.57% in 2008 to 10.58% in 2009, a reduction of 27%. This indicates the internal systems and processes within Shisa Wasabi are more anemic than the gross margin calculation had shown. It also indicates that the assets may be aging quickly and needing repair to continually stay at a level of deliver higher ROA year-over-year. Unfortunately for this company their ROA is declining nearly a third in just a year, which signals significant slowdowns and lack of effiencies internally.

Return on Assets Calculations

Net Profit Margin

Calculation

2009

Calculation

2008

Net Income

Total Assets

2,100 / 19,400

=.1058 = 10.58%

10.58%

2,390 / 16,400

= .1457= 14.57%

14.57%

Ret

The third financial ratio used to evaluate the potential investment in Shisa Wasabi is Return on Equity. Just as the previous two ratios showed, this also has a reduction occurring between 2008 and 2009. Dropping from 23.96% in 2008 to 19.36% in 2009, this ratio indicates ROE experienced a 19.1% reduction, which is very significant. Of the three ratios, the reduction of ROE is the most severe and critical in terms of an investment decision. It says this company is very risky and there is a very good chance any funds invested in it will not earn a return. It could be argued an investment of $500,000 in a worst case scenario, could end up being worth only $400,000 in a year.