Financial Analysis · Lesson 10 · Capstone
Capstone: ACME Inc.
The Situation
ACME Inc. is a manufacturer seeking investment to fund an expansion. You have three years of financial statements and management’s projection for next year. Depending on the scenario you prefer, you are either evaluating a private stake in ACME or deciding whether to buy its shares at a price that assumes the projection comes true.
Work through the numbers before reading the observations — this is the whole course in one company.
Income Statement Excerpt
| Item | Year 1 | Year 2 | Year 3 | Projected |
|---|---|---|---|---|
| Revenue | $1,000,000 | $1,100,000 | $1,200,000 | $1,800,000 |
| Cost of sales | $650,000 | $715,000 | $800,000 | $1,080,000 |
| Gross profit | $350,000 | $385,000 | $400,000 | $720,000 |
| Operating expenses | $300,000 | $330,000 | $360,000 | $440,000 |
| Net income | $50,000 | $55,000 | $40,000 | $280,000 |
- Revenue is projected to jump +50% after years of ~10% growth.
- Gross margin improves from 33.3% to 40.0% — with no stated mechanism.
- Operating expenses rise only modestly despite 50% more sales.
- Net income increases sevenfold, from $40K to $280K.
The projection may be valid — but every one of those lines needs support: contracts, sales pipeline, capacity analysis, cost assumptions, a working capital forecast.
Balance Sheet Excerpt
| Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Cash | $80,000 | $55,000 | $25,000 |
| Accounts receivable | $100,000 | $130,000 | $165,000 |
| Inventory | $70,000 | $90,000 | $110,000 |
| Current assets | $250,000 | $275,000 | $300,000 |
| Operating line drawn | $40,000 | $75,000 | $120,000 |
- Receivables up 65% and inventory up 57%, while sales rose only 20%.
- Cash has fallen by two-thirds.
- Reliance on the operating line has tripled.
- Working capital is absorbing the reported profit — the income statement alone would never show this strain.
The Ratios (Year 3)
Additional Year 3 data: current liabilities $250,000; total liabilities $900,000; equity $300,000; EBITDA $150,000; annual debt payments $130,000.
| Ratio | Calculation | Result |
|---|---|---|
| Current ratio | $300,000 ÷ $250,000 | 1.20 |
| Debt-to-equity | $900,000 ÷ $300,000 | 3.00 |
| Debt-payment coverage | $150,000 ÷ $130,000 | 1.15× |
The cushion is thin everywhere. And the stress test from Lesson 9 applies directly: sales 15% lower cuts EBITDA to roughly $90,000 against the same $130,000 of debt payments — coverage of 0.69×. A modest downside breaks the structure, and the equity holder owns that outcome.
The Decision
Pulling the whole course together:
- The business: real, growing, and profitable — but the growth is consuming cash, margins have drifted down, leverage is high, and coverage is thin. The forecast that justifies the investment is unsupported at every line that matters.
- As a private investor: this is not an automatic pass — it is a negotiate. Stage the funding against milestones. Require monthly reporting and a working capital forecast. Restrict dividends until leverage falls. Price the round off the $40–55K of demonstrated earnings, not the $280K of hoped-for ones.
- As a public-market investor: the question is entirely about price. If the shares are priced for the projection, you are paying today for a future management hasn’t evidenced — with no ability to negotiate protections. If they are priced for the history, the thin cushions may already be in the price.
The best question, always: does the financial story make sense? ACME’s statements tell one consistent story — a decent business straining against its working capital — while its forecast tells a different, better one with nothing underneath it. Invest in the company you can verify, at a price that reflects it, or don’t invest at all.
Final Test
Ten questions covering the full course — the ACME case and the concepts behind it. Score 70% or better and you can genuinely say you know how to read a company.
ACME projects net income of $280,000 next year after earning $40,000 this year. What is the single most important thing an investor needs before believing this?
Course Takeaways
- Read all five documents together — statements, notes, and assurance report
- Compare historical trends to projected assumptions
- Use ratios to find risk signals, not to replace judgment
- Cash flow and coverage decide survival; valuation decides your return
- The best question: does the financial story make sense?