Question

Analyze the common size income statements below, for West Company.

How has the company’s gross margin evolved from 2016 to 2017 and what are possible reasons for such evolution?

How has the company’s operating income evolved from 2016 to 2017 and what are possible reasons for such evolution? Elaborate on the sustainability of recent changes in operating expenses.

How has the company’ s interest expense impacted its net income from 2016 to 2017 and what are possible reasons for such evolution in terms of the company’s sources of funding?

In percentage 2017 2016

Net sales 100 100

COGS 35 40

Gross margin 65 60

Research and development expenses 12 9

Selling, General and Admin. Expenses 11 17

Restructuring, impairments and others 0 8

Operating income 42 26

Interest expense 14 8

EBT 28 18

Taxes expense 8 0

Net income 20 18

Answer 1

1) The the company’s gross margin has increased from 60% to 65% from 2016 to 2017 mainly because the COGS has gone down from 2016 to 2017.(40% to 35%)

2) The operating income has gone up from 26% to 42%. This is mainly due to steep reduction in selling general and admin expenses and reduction of restructuring, impairments and others to 0. However, this decrease is not sustainable mainly because the selling and admin expenses can fluctuate year on year. However, the restructuring expenses can be maintained at 0 as the firm might have completed its restructuring program and the impairments would also have written off last year.

3) The interest expense has almost doubled which has a negative impact on the net income from 2016 to 2017.

The company must have issued more high yield debt to fund its operations in 2017 rather than equity financing.