FI499 Unit 4 Capstone Financial Statement Analysis Example

Flat Profit on Rising Sales: A Unit 4 Capstone Financial Statement Analysis That Tests the Assumptions on File

[Student Name]

Purdue University Global

FI499: Bachelor's Capstone in Finance

Unit 4 Financial Statement Analysis

[Instructor Name]

[Date]

Tidewell, Paddlemark and every figure are composite; the books and article cited are real.

Summary of Findings

Paddlemark's sales grew every year, but its EBITDA did not: rising labor costs absorbed the growth, and the margin fell from 28.1 to 25.0 percent. That puts assumption A4, a margin recovery to 27 percent, under pressure. Paddlemark has also underspent on upkeep, which supports the $900,000 conversion budget in A7. Its revenue has shifted toward monthly tuition plans, which steadies revenue but raises exposure to the rebrand risk behind A1. Tidewell's own statements show ample room to carry the acquisition loan.

Paddlemark: Growth Without Profit Growth

Over three years, Paddlemark's revenue rose from $7.53 million to $7.96 million to $8.40 million, about 5.6 percent a year. EBITDA was $2.12 million, then $2.10 million, then $2.10 million. The business grew by almost $900,000 in sales and earned nothing more from it.

The cause is labor. Instructor and front-desk pay rose from 31 to about 32.6 to 34 percent of revenue as the regional market for certified swim instructors tightened and Paddlemark raised pay to keep staff. Other costs held steady as a share of revenue. Labor explains almost all of the three-point margin decline.

What This Means for A4

Assumption A4 has Paddlemark's margin recovering from 25 to 27 percent by year three under Tidewell's ownership. The statements show the trend running the other way. Tidewell's case for recovery rests on its scheduling system, which fills classes more fully and so spreads instructor pay over more students; Tidewell's own labor cost is 29 percent of revenue at a similar pay scale.

That argument is plausible, but the statements do not prove it. They show only that Paddlemark's margin has been falling, and that Tidewell runs a tighter operation. A4 is therefore flagged in the change log: its value stays at 27 percent, but its support is argument, not evidence, and Unit 8 must test how much the answer depends on it.

The statements confirm that Paddlemark needs investment and that Tidewell can afford to buy it, but they do not confirm the margin recovery the valuation counts on, so the assumption that matters most is the one the evidence supports least.

Paddlemark: Underspent Upkeep, Which Confirms A7

Over three years, Paddlemark spent $540,000 on capital projects across six schools while recording $1.86 million of depreciation. A business that spends less than a third of its depreciation on upkeep is letting its assets run down. Tidewell spends about $60,000 per school per year; Paddlemark has spent about $30,000. Two of Paddlemark's pools are running original filtration systems more than fifteen years old.

That supports A7's $900,000 conversion budget, which includes filtration upgrades at two schools. If anything, it suggests the budget is not generous. A7 is confirmed and marked high confidence.

Paddlemark: More Revenue From Tuition Plans

Monthly tuition plans grew from 44 to 48 to 52 percent of revenue as Paddlemark moved families from term-by-term enrollment to automatic monthly billing. Plan revenue is steadier and cheaper to collect, which is good. It is also easier to cancel: a family on a term pays up front for ten weeks, while a family on a plan can stop any month. Research on service businesses has long held that keeping existing customers drives profitability more than winning new ones (Reichheld & Sasser, 1990). The shift raises the importance of A1, the first-year revenue assumption. The statements cannot say whether families will stay after the rebrand; they say only that more of them now can leave easily. A1 remains low confidence and is supported by argument only.

Paddlemark: Working Capital and Cash

The cash flow statements support A9, which sets the change in working capital at zero. Tuition is billed at the start of each month and term fees are collected before classes begin, so Paddlemark holds customer money before it delivers lessons. Deferred tuition on its balance sheet has run between $410,000 and $460,000 at each year-end, moving with revenue. Suppliers, mostly pool chemical and equipment vendors, are paid within thirty days. Neither balance has moved enough to change cash flow by more than $40,000 in any year. A9 stays at zero, high confidence.

The deferred tuition does carry one implication for the deal. At closing, Tidewell will take on the obligation to deliver lessons already paid for. The purchase agreement should credit Tidewell with the deferred balance, about $450,000, or reduce the price by that amount.

Paddlemark: Quality of Earnings

Two items in Paddlemark's results need adjusting before its EBITDA is compared with the price. Its founder drew a salary of $95,000 a year, below what Tidewell would pay a regional manager to replace her; at a market salary of about $130,000, trailing EBITDA would fall by $35,000. Against that, Paddlemark recorded $42,000 of one-time legal costs last year from a lease dispute that has since been settled. The two roughly offset, so the $2.10 million trailing EBITDA in the case file is a fair base, and the ten-times multiple is computed on a figure that holds up.

Paddlemark Against Tidewell

Paddlemark's revenue per school is $1.40 million against Tidewell's $1.76 million. Some of the gap reflects smaller pools at two Paddlemark schools, and some reflects weaker scheduling. If Tidewell could lift Paddlemark's schools to its own level, revenue would rise by more than $2 million. The analysis does not count this in the valuation, because nothing in the file shows it can be done, but it notes the gap as possible upside.

Tidewell: Room to Borrow

Tidewell's statements show $12.0 million of debt against $7.38 million of EBITDA, or 1.63 times. Its operating profit after depreciation covers interest 5.3 times. After the acquisition, with the $14.0 million term loan added, debt would be $26.0 million against combined EBITDA of about $9.48 million, or 2.74 times, below the 3.5-times covenant in A12. The financing in A11 is affordable on current results.

Changes to the Assumption Log

A4 is flagged: value unchanged, confidence low, support is argument only. A7 is confirmed and raised to high confidence. A1 is unchanged and remains critical. No other assumption is affected. Valuation texts recommend that analysts compare forecasts with past performance before valuing, precisely so that a break from history, like A4's recovery, is made explicit and defended (Koller et al., 2020; Damodaran, 2012).

References

Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.

Reichheld, F. F., & Sasser, W. E., Jr. (1990). Zero defections: Quality comes to services. Harvard Business Review, 68(5), 105-111.