# Tuesday Morning Corporation (TUES) Guide To Value Investing

July 26th, 2012 Posted by No Comment yet

## TUES Balance Sheet

### Liquidity

Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that can be easily turned into the liquid are current assets which include inventory and receivables. To know Tuesday Morning Corporation financial status, we calculate current assets using ratios such as current ratio, quick ratio and working capital from 2007 to 2011 in this value investing guide. Below are the results:

 Particulars 2007 2008 2009 2010 2011 Average Current Ratio 2.2 2.8 3.1 2.8 2.7 2.7 Quick Ratio 0.12 0.22 0.22 0.34 0.31 .24 Working Capital 165 168 164 174 188 172

#### Explanation:

• Current ratio average was 2.72; meaning that current asset is greater than current liabilities. For every \$2.72 of the current asset is to \$1 of current liabilities.
• Quick ratio average was .24, which means that minus the inventory, the company’s monetary asset was only 24 percent of its current liabilities.
• The average working capital was \$172, which shows that the company was able to meet its current obligations. As per above table, it shows a positive amount for 5 years in operation. However, noted are 2 percent increase in 2008 then went down in 2009 by 2 percent but recovered and increased by 6 percent and 8 percent respectively in 2010 to 2011.

### Working Capital

Working capital was calculated to know whether the company was able to meet its current obligations, pay bills, meet payroll and make loan payments. A positive working capital measures the strength of the firm. It is what you have left over after the company pays its short-term debt obligations. The company’s current ratio shows that its current asset was greater than current debt by an average of 272 percent, however, if inventory is deducted its average quick ratio was only .24.  Inventory is an important current resource for the company. If not be sold immediately, it will become obsolete and funds are tied up in inventory.

### Efficiency Ratios

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. Inventory turnover ratio signifies the number of times inventory is sold and restocked each year. If the number is high, you may be in danger of stock outs. If it is low, watch out for obsolete inventory.

Accounts payable to sales ratio measures how the company pays its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio with all bills be paid in a timely manner. The fixed asset turnover ratio looks at how efficiently the company uses its fixed assets, like plant and equipment, to generate sales.

#### TUES efficiency ratios from 2007 to 2011:

 Particulars 2007 2008 2009 2010 2011 Average Inventory Turnover Ratio 1 2 2 2 2 2 Receivable Turnover Ratio 0 0 0 0 0 0 Payable Turnover Ratio 5 14 17 13 10 12 Fixed Asset Turnover Ratio 5 11 11 11 11 10
• Inventory turnover ratio has an average of 2 times turn each period which means that its inventory is not sellable.
• The receivable turnover ratio was 0 or zero since the company has no accounts receivable.
• The payable Turnover ratio was 12 times average per year.
• Fixed asset turnover ratio was 10 times average each period.

Asset management ratio or efficiency ratio of TUES was not healthy since it has a low inventory turnover of 2 times only which might result in obsolete stocks. Its payable turnover ratio was also high at 12 times average per period, with the low turnover on inventory; sales also become slow which may result in irregular payment of its obligations.

### Cash Conversion Cycle

It is vital that the business owner calculate the cash conversion cycle. It tells the owner the number of days that cash or capital stays tied up in the business processes of the firm. The cash conversion cycle is a measure of working capital efficiency.

The cash conversion cycle calculation has three parts: inventory, receivables, and payables. In order to calculate the cash conversion cycle, you first have to calculate the conversion period for inventory and receivables and the deferral period for payables.

#### CCC from 2007 to 2011:

 Particulars 2007 2008 2009 2010 2011 Average Inventory Conversion Period 409 156 162 170 190 217 Receivable Conversion Period 0 0 0 0 0 0 Payable Conversion Period 116 41 34 45 58 59 Cash Conversion Cycle 293 115 128 125 131 158
Explanation:
• Inventory conversion period was 217 days average. With its low inventory turnover, its conversion period was not good at 217 days.
• Days’ receivable was 0.  The company was giving big discounts, so the stocks were sold in cash basis.
• Days’ payable has an average of 59 days. It will take 59 days or 2 months for the company to pay its suppliers.
• Cash conversion cycle has an average of 158 days, which means that it takes 158 days to convert into cash its inventory.

Considering the company’s asset management or efficiency ratio results, the company’s finances is not healthy since the inventory is quite high at an average of 91 percent of total assets. This is the factor of very slow in cash conversion cycle.

Financial leverage ratios give us the idea of the company’s debt capital. TUES leverage ratios of the company from 2007 to 2011:

 Particulars 2007 2008 2009 2010 2011 Average Debt Ratio 0.45 0.32 0.26 0.29 0.31 .33 Debt to Equity Ratio 0.83 0.47 0.36 0.42 0.46 .51 Solvency Ratio 0.07 0.29 0.2 0.26 0.22 .21 Current Liabilities to Total Assets 0.36 0.27 0.24 0.28 0.29 .29 Stockholders’ Equity to Total Assets 0.55 0.68 0.74 0.71 0.69 .67

#### Explanation

Debt ratio, which is dividing total assets by total liabilities, has an average of .33 meaning that 33 percent of the total assets were loaned. The ratio of its total debt against total equity was .51 also means that 51 percent of the total equity was loaned. So, solvency ratio is quite good at .21.  Likewise, the creditors or its suppliers have 29 percent in control of the total assets, while the owners have 67 percent claims. Therefore, they are the majority in control of the company as a whole.

### Plant, Property & Equipment

PPE? Ever heard of that acronym?  That is Property, Plant, and Equipment. For this company, how was PPE went on? Let’s take a look at the table below.

 Particulars 2007 2008 2009 2010 2011 Average Property, Plant & Equipment, Gross 186 196 206 190 210 198 Accumulated Depreciation 102 118 134 117 133 121 Property, Plant & Equipment, Net 84 78 72 73 77 77

TUES has recorded yearly investment of fixed assets in five years. Its investment in PPE as shown in the above table was \$198 average. After deducting its accumulated depreciation of \$121 or 61 percent, the net book value was \$77 which is equivalent to 39 percent of the original cost.

Using the percentage method of depreciation, the company’s plant, property & equipment has a remaining life of 1.9 years or less than 2 years of service until it is fully depreciated. Therefore,   TUES could still utilize its fixed assets in less than two years period before the management will acquire new units.

## TUES Income Statement

The income statement shows the results of operations of a company for a period of time. This is a measure of the economic performance of the company by identifying specific revenue and expense items telling us what had happened during the accounting period.

### Profitability

The company’s net margin tends to be inversely related to the asset turnover; this means that they have the lower net profit margin and higher volume of asset turnover. Their return on assets tells us their effectiveness in utilizing assets in their operations which were good in 2008 and 2010. In 2009 due to a decrease in total assets of the company and net loss resulted to -0.01. But in 2011 it recovered with an increase in total assets and net income gained from its operations resulted in 2.63 percent return.

#### Moreover,

Looking into their return on equity using the DuPont method wherein the formula is net profit margin multiply with asset turnover multiply with equity multiplier. The equity multiplier is the measure of financial leverage allowing the investors to see what portion of the return on equity is the result of debt. In the case of this company, their financial leverage has been decreasing with minimal increases in 2010 and 2011. It shows a result of 1.83 percent, 1.47, 1.36, 1.41, and 1.46 from 2007 to 2011. And this was the return earned on the debt at work in their operations. Return on equity due to profit margins and sales resulted in 0.65 percent, 2.52, 0, 1.24 and 1.14 from 2007 to 2011.

#### Conclusion:

Therefore, comparing the two results they earned more on debt at work during the four years except in 2008 wherein ROE was impressive a higher percentage arose from internally generated sales.

The efficiency of the results of operations as a gauge of their profitability ratios was computed as follows:

 Particulars 2007 2008 2009 2010 2011 Net Margin 0.75 1.64 -0.01 1.3 1.17 Asset turnover 1.04 2.41 2.43 2.47 2.25 Return on assets 0.78 3.94 -0.01 3.21 2.63 Financial leverage 1.83 1.47 1.36 1.41 1.46 Return on equity 1.43 6.47 -0.02 4.45 3.77 Return on investment capital 1.13 5.96 -0.02 4.45 3.77

Explanations

• Starting with their net profit margins; which was the after-tax profit a company generated for each dollar of revenue; they depicted an up and down trend for five years of operations… a net loss in 2009 then recovered slightly in 2010 with a bit decrease in 2011.
• Their assets turnover, a measure of how effectively a company converts its assets into revenue, showed a good volume of earnings from assets. From 2008 to 2010, earnings had an average of 2.44 times with a slight decline in 2011.
• Return on assets measures the company’s general earning power. TUES, in 2007, showed a low return while 2008 and 2010 abruptly increase to 3.94 and 3.21 but -0.01 in 2009 due to a net loss.
• With regards to their financial leverage, this allows the investors to see what portion of the return on equity is the result of debt. Wherein it depicts that in 2007 as the highest 1.83, decreasing slightly in 2008 to 2009 but increase to 1.41 and 1.46 in 2010 and 2011.
• Their return on equity using the DuPont method depicted a high in 2008; in 2009 it decreased low due to net loss, but good enough the company was able to recover in 2010 and 2011.
• And their return on invested capital was almost the same with return on equity except for the year 2007 and 2008.

### Income

Reviewing their revenues, it shows a growth ratio of -80.16 percent, 116.70, -9.44, 3.31 and -0.86 from 2007 to 2011. Their operating income has a growth ratio of -99.08 percent, 335.45, -90.20, 727.31 and -10.43. And net income growth ratio of -99.31, 370.56, 0, 0 and -10.88. The increases in 2008 and 2010 growth ratios means the company acquired additional long-term debt of 9 million in 2008 to be used in operations thus, an increase was due to internally generated sales and debt at work, therefore, an increase in their income as shown in their total cash and total current assets in 2010.But in 2011 there was a slight decrease due to the purchases of plant, property, and equipment.

#### The income from 2007 to 2011:

 Particulars 2007 2008 2009 2010 2011 Revenues 409 885 802 828 821 Gross profit 151 323 296 314 313 Operating income 6 25 2 20 18 Income before taxes 5 22 0 17 16 Net income 3 14 0 11 10
• Overall income showed an abrupt increase from 2007 to 2008, decrease in 2009 and 2011 with an increase in 2008 and 2010.
• Revenues in million dollars had a yearly average of 749.  This was the company’s yearly total earnings. Its first-quarter revenue of 173 represents 23 percent of average revenue.
• Gross profit had an average of 279.4; this was company’s income after deducting its cost of revenue. Its first-quarter gross profit of 66 represents 23.6 percent of average gross profit.
• Operating income had an average of 14.2; this was company’s income after deducting all operations expenses. Its first-quarter operating income of -6 represents -42.3 of average operating income.
• Income before taxes had an average of 12; this was the income after interest and other income and expenses. The first quarter income before taxes of -7 represents -58.3 of average income before taxes.
• Net income had an average of 7.6; this was the company’s income after deducting income taxes. Its 1st quarter net income of -4 represents -52.6 of average net income.

### Expenses

TUES expenses especially their cost of revenue accounts for an average of 62.7 percent of their revenues leaving an average gross profit margin of 37.3. Operating expense accounts 35.4 percent, therefore operating margin had an average of 1.82 only. So, after deducting interest expenses of 0.37, other income and expenses of 0.05 and provisions for income taxes of 0.59 of revenues, leftover or its net income represented 0.85 percent of average revenue. This showed a very low percentage of revenues. It meant a high cost of revenue and operating expenses to a total of 98 percent leaving only a small margin of 2 percent which was not favorable.

#### Expenses and margins from 2007 to 2011 as follows:

 2007 2008 2009 2010 2011 Cost of revenue 258 563 506 514 508 Operating expenses 145 298 294 294 295 Interest expense 1 4 3 3 3 Other income (expense) 1 1 0 -1 1 Provision for income tax 2 8 0 6 6 Gross margin 36.9 36.5 36.9 37.9 38.2 Operating margin 1.4 2.8 0.3 2.4 2.2 EBT margin 1.24 2.5 -0.01 2.01 1.89 Net margin 0.75 1.64 -0.01 1.3 1.17
• Cost of revenue yearly average is 469.8.  This accounts 62.7 percent of revenues.
• The operating expense yearly average is 265.2.  This accounts 35.4 of revenues.
• The interest expenses yearly average is 2.8 and this accounts 0.37 of revenues.
• Other income and expenses yearly average is 0.4.  This accounts 0.05 of revenues.
• Provisions for income taxes yearly average is 4.4. This accounts 0.59 of revenues.
• Computing yearly averages of the following:
• Gross margin averages 37.3 percent; operating margin 1.82; EBT margin 1.24 and net margin of 0.97.

## TUES Cash Flow Statement

Cash flow statement is very important for every decision making. It will lead and guide every manager, decision maker, credit analyst and also to its investor, whether to keep their funds for the future or re-invest it.

### Cash Flow from Operating Activities

Cash flow from operating activities is cash net available from the operation which can be determined using the indirect method of accounting. Results for TUES are as follows:

• Net income is an income left after the company pays all the total expenses including the income tax.
• Depreciation was a cost allocation of the asset. Amortization was the paying off of debt in regular installments over a period of time.
• Inventory was an item or product carried by the company which ready and available for sale.
• Other working capital like changes in market share, sales revenues and operating metrics.

The net cash flow from operating activities of Tuesday Morning Corporation was negative in 2007 due to net income was only 7 percent over their revenue. In 2008, it recovered at 194 percent but in 2009 decreased by 46 percent and maintained in 2010. In 2011, indicated zero due to the inventory was equal to the net income and depreciation. It will be expected to have a possible increase in 2012 based on the Q1 result of 2012 compared in 2011, was increased to 122 percent.

#### Table 1

 Particulars 2007 2008 2009 2010 2011 2012Q1 Net income 3 14 0 11 10 Depreciation & amortization 9 18 17 16 16 Inventory -46 48 17 -16 -26 Other working capital -24 -21 2 -1 0 Net cash provided by operating activities -56 59 32 32 0 122% from 2011Q1

In the direct method, cash flow from operating activities are:

Table 2

 Particulars 2007 2008 2009 2010 2011 Cash collection 409 885 802 828 821 Cash payments for purchases 212 611 516 510 485 Cash payments for operating expenses 145 293 295 288 293 Cash paid for income taxes 0 6 3 Cash paid for interest 2 2 2 Cash flow from operating activities 52 -19 -11 22 38

Cash flow from operating activities will be determined also through using the direct method of accounting. It will be calculated from the cash collection less all the cash payments made from purchases, operating expenses, income taxes also interest. To entail each particular above;

#### Explanations:

• A collection was a result of the total revenue per year and by adding the decrease / less the increase of accounts receivable of the company.
• Cash payments for purchases was a total cash paid for all purchased made by the company. Through from the cost of goods sold and by adding the increase / less the decrease in inventory and add all the decrease/ less the increase in accounts payable.
• Cash payments for operating expenses were total cash paid by the company for operational used like rent, telephone bills, and office supplies. From the total operating expenses and add all the increase / less the decrease in prepaid expenses and by adding the decrease / less any increase in accrued liabilities.
• The cash paid for income taxes was cash paid by the company for the income tax of the period.
• The cash paid for interest was cash payment made for the interest.

Cash flow from operating activities using the direct method in accounting indicates in 2008 and 2009 was in negative. It tells us that cash payments made was exceeded from their cash collection; was also signifies company’s inefficiency.

Cash flow from investing activities was an activity of cash wherein the company used their cash. In TUES, we can see in table 2, they only used for the PPE. Property, plant, and equipment was for long-lived physical assets used in the normal conduct of business and not intended for resale. This can include land, physical structures, machinery, vehicles, furniture, computer equipment, construction in progress, and similar items.

#### Table 3

 Particulars 2007 2008 2009 2010 2011 Investments in property, plant, and equipment -7 -12 -12 -17 -21 Other investing charges 0 0 0 0 0 Net cash used for investing activities -7 -12 -12 -17 -20

The cash flow from investing activities in percentage from 2008 to 2011 grew from 42, 0, 29 and 15. It tells us that the company was spending more for the PPE. I noticed in 2009, the investment is not moving probably due to the net income was also zero. It means the management was very conservative in decision making based on the bottom line result.

### Cash Flow from Financing Activities

Net cash from financing activities was in sideways. In their five years of operation, it shows in 2008 and 2009 the company had a negative result. It means, the company outflow exceeds from their cash inflow.

Cash flow from financing activities is an activity of cash where the company used and raised funds. The sources would come from the following:

• Short-term borrowing was a current portion of long-term debt or usually, a debt not exceeds in one year.
• Long-term debt issued was normally the company issued bonds or a debt obligation lasting over one year.
• Long-term debt repayment was an act of paying back money previously borrowed.
• Common stock was a stock that normally issued by a common stockholder of the company.
• Cash dividends paid was a dividend paid or issued by the company.
• Other financing activities like sale of treasury stocks.

#### Table 4

 Particulars 2007 2008 2009 2010 2011 Short-term borrowing -10 3 15 Long-term debt issued 233 62 152 Long-term debt repayment -241 -62 -152 Common stock 0 0 0 0 0 Cash dividends paid -33 Other financing activities 56 -49 -4 0 1 Net cash provided by (used for) financing activities 23 -49 -23 3 16

### Free Cash Flow

The free cash flow result of Tuesday Morning Corporation in their five years of operation was disturbing, instead, it was corrected in 2008 at 229 percent increase but from 2009 to 2011 was consistently went down by 140, 33 and 172 percent, respectively. The good thing will be expected to recover by 153 percent based on the 2012Q1 result.

Free cash flow measures company’s sustainability after paying all the expenses and capital maintenance of its business. It can be used for expansion, dividends and reducing debt. Using the result from net operating cash flow less the capital expenditure we can determine the FCF. It matters since free cash flow result has a direct impact on the worth of a company which some investors often hunt for companies who have a high and improving free cash flow.

#### Table 5

 Particulars 2007 2008 2009 2010 2011 2012Q1 Net operating cash flow -56 59 32 32 0 50 Capital expenditure -7 -12 -12 -17 -21 -10 Free cash flow -62 48 20 15 -21 40

Total debt ratio measures a company’s efficiency in paying their total obligation. Through using the result of net operating cash flow over the total liabilities per year (see table 6 below), we can determine how much cash percentage available to pay its total debt. To recall; total liabilities was a total obligation of the company, this is an account wherein all the unpaid debt classified.

#### Table 6

 Particulars 2007 2008 2009 2010 2011 Net cash provided by operating  activities -56 59 32 32 0 Total liabilities 179 109 84 103 119 Total debt ratio in percentage -31 54 38 31 0

The total debt ratio result of TUES was recovering by 158 percent in 2008 but also turn down consistently by 42, 23 and 0 percent from 2009 to 2011, respectively. It was affected by the movement result of cash from operating which it had increased at 194 percent in 2008, then started to decrease by 84 percent in 2009 and steady result in 2010. The total liabilities were in sideways, decreased by 113 percent from 2007 to 2009 while an increase of 29 percent in 2011. It tells us that even the company’s liabilities in first three years was declining, they are only able to pay its debt at \$.20 for every \$1; it indicates insufficiency of cash.

Written by Rio, Nelly and Dyne
Edited by Cris