The Gerber Products Company Case

5

With respect to Gerber's financial resources, analyses are performed with respect to (1) liquidity, (2) leverage, (3) activity, and (4) profitability. The company's liquidity position deteriorated from 1986 to 1987. The current ratio slipped from 2.7 times in 1986 to 2.1 times in 1987. While the decline in the current ratio was significant in the context of magnitude, the 1987 ratio remained strong. The quick ratio deterioration, however, is a different matter. The quick ratio dropped from a strong 1.4 times in 1986 to a quite marginal 0.9 times in 1987. Further slippage in the quick ratio, coupled with the onset of a recession (not projected for the near future in early 1988), could expose the company to a significant liquidity risk.

The company's leverage position also deteriorated from 1986 to 1987. The long term debt to equity ratio rose from 0.2 in 1986 to 0.5 in 1987. The level of the 1987 ratio is not risky for the company; however, a risk could develop if the change from 1986 to 1987 is the beginning of a trend. The times interest earned ratio declined from 4.2 times in 1986 to 1.7 times in 1987. The 1987 ratio remained satisfactory; however, further deterioration could create significant problems for the company.

Gerber's activity ratios remained relatively stable from 1986 to 1987.

On page 467 of the case, it is stated that net sales for Gerber in 1986 were $967.9 million. On page 483 of the case, however, net sales for the company were indicated as $839.5 million in the consolidated statement of operations. It is possible that the higher figure included company operations outside the United States, while the lower figure did not. Form the information provided in the case, however, there is no way to tell. Thus, in this case analysis, the data included in the financial statements included in the case were assumed to be the accurate figures.

In the context of operating efficiency, performance in all three of Gerber's product groups declined from 1986 to 1987. The furniture group accounted for 11.8 percent of company sales in 1987. The group's operating profit declined from 5.0 percent of sales in 1986 to 4.4 percent in 1987 a profitability decline of 12.0 percent as a proportion of sales. The apparel group accounted for 27.1 percent of company sales in 1987. The group's operating profit declined from 10.7 percent of sales in 1986 to 7.5 percent in 1987 a profitability decline of 29.9 percent as a proportion of sales. The baby food group accounted for 61.1 percent of company sales in 1987. On page 478 of the case, it is stated that baby food accounted for only approximately 50 percent of Gerber's total sales. This statement in the case is an example of the incorrect and sloppy data presented throughout the case. Total Gerber sales in 1987, according to the consolidated statement of operations on page 483 of the case was $917.3 million in 1987. On page 489 of the case, it is stated that apparel group sales in 1987 were $248.5 million, and that furniture group sales were $107.8 million. Thus, the remaining $561.1 million in sales were for the baby food group, which translated into 61.1 percent of total sales.

 

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