FIN 3100 Principals of Finance Summer 2014
Case Study #1 - HiTop Toys, Inc.
Financial Ratio Analysis
30 Points Possible
Charles Stevens, vice president for investment analysis at First National Bank of Florida, is looking for a company to recommend to the bank’s portfolio committee for inclusion in its “
buy list” for the various trust funds managed by First National’s trust department. Steven’s criteria for recommending a company were that it be a good, fundamentally sound, long term prospect and not a hot stock. Since the stock market crash, portfolio returns had been rather weak. Stevens hoped to convince the portfolio committee to take a long term view of the market rather than focus on short term price changes.
Stevens had recently read an article in the Wall Street Journal concerning HiTop Toys, Inc., a toy manufacturer. HiTop had posted a six month pretax profit margin of 10 percent. While this was far below the 15% profit margins enjoyed before the market decline, it was far ahead of other companies in the industry. Perhaps HiTop was a good long term investment.
The toy industry depended on three main factors for growth: the economy, demographics, and new product innovations on a regular basis. The average life for new products in the toy industry was only one or two Christmas seasons. Companies had two choices to maintain their sales strengths. Either they came up with regular product innovations or they relied on strong standby toys.
HiTop had changed its marketing strategy during the past two years. Management was concentrating on its solid performing toys and moving away from the highly risky (yet potentially very profitable) promotional, faddish toys that had dominated the toy market over the most of the past decade. However, for the past two years, shipments of the blockbuster toys had steadily declined, leaving the manufacturers with obsolete inventory and machinery. Two of HiTop’s three primary competitors had put too...