The most expensive year in LEGO's history
The LEGO Group, 2004 · Financial analysis · Read the study: maxnoble.com/study/0006-en
For the class
1Work out LEGO's profit margin for 2004, before and after the clean-up. What does the difference tell you about the core?
2Work out return on assets and the cost of debt. Is the interest margin positive or negative, and what does that mean for the owners?
3The current ratio looked healthy. Work it out and explain why it can fool you.
Answers · for the teacher
No. 0006-en · The most expensive year in LEGO's history
1Work out LEGO's profit margin for 2004, before and after the clean-up. What does the difference tell you about the core?
After the clean-up: −1,122 ÷ 6,704 × 100 = −16.7%. Before the clean-up: 103 ÷ 6,704 × 100 = 1.5%. The business itself made a small profit. It was the write-down of factories and machines (DKK 723 million) and lay-offs and closures (DKK 502 million) that turned the year into a large loss. The core was sick but alive.
In the study: Key figure 1 of 7 · Your verdict
2Work out return on assets and the cost of debt. Is the interest margin positive or negative, and what does that mean for the owners?
ROA = −1,122 ÷ 8,089 × 100 = −13.9%. Debt = 8,089 − 2,948 = DKK 5,141 million. Cost of debt = 219 ÷ 5,141 × 100 = 4.3%. Interest margin = −13.9 − 4.3 = −18.1 percentage points (−18.2 if you round first). It is negative: the assets earn less than the loans cost, so every borrowed krone makes the owners' loss bigger. With gearing of 1.74, return on equity was −1,931 ÷ 2,948 × 100 = −65.5%.
In the study: Key figures 3, 4 and 5 of 7
3The current ratio looked healthy. Work it out and explain why it can fool you.
3,615 ÷ 1,473 × 100 = 245%, well above the 150% rule of thumb. But the figure is a snapshot taken on New Year's Eve, and only DKK 312 million was cash. The rest was stock, receivables and buildings for sale. Liquidity and the owners' loan bought time; only a positive profit margin could make the rescue last.
In the study: Key figure 7 of 7 · Your move
Answer key · all nine key figures, from the study's own figures (DKK million)
| Key figure | Working | Result |
|---|---|---|
| Profit margin | −1,122 ÷ 6,704 | −16.7% (before the clean-up 1.5%) |
| Asset turnover | 6,704 ÷ 8,089 | 0.83 times (2003: 0.72) |
| Return on assets | −1,122 ÷ 8,089 | −13.9% (check: −16.7% × 0.83) |
| Cost of debt | 219 ÷ 5,141 | 4.3% |
| Interest margin | −13.9 − 4.3 | −18.1 percentage points |
| Gearing | 5,141 ÷ 2,948 | 1.74 times |
| Return on equity | −1,931 ÷ 2,948 | −65.5% |
| Equity ratio | 2,948 ÷ 8,089 | 36.4% (with the subordinated loan: 46.3%) |
| Current ratio | 3,615 ÷ 1,473 | 245% |
Hand out page 1 after the reading. Page 2 holds the answers. Every answer is in the study; nothing new is added.