Name Dibayan Roy
Question no: 1
Answer for Question : 1A
Out of the net income of 1,534 expected to be earned in 2006 only 226 will translate the
‘cash flow from from operation ‘ for 2006. This means only 14.73% of the net income will
translate to the ‘cash flow operation’. Out of the three categories, ‘Operating Cash Flow ‘
has contributed majorly to the decrease in the ‘Change in cash’ by the company from
2003 to 2006(E).
Answer for Question : 1B
Trend in cash flow from ‘operating activities’ – Over the year, the cash flow from the
operating activities are constantly decreasing. The reason for decrease in cash flow from
operating activities in ‘Increase in Account Receivable’. Trend in cash flow from
‘Investing Activities’- over the year, the cash flow from investing activities are increasing.
Reason for increase in cash flow from investing activities is the decrease in investment in
land over the years. Trend in cash flow from ‘financial activities’- The cash flow financing
activities increased constantly from 2003 till 2005 but decreased in 2006(E). Reason for
firstly increase and then decrees in cash flow from investing activities in the amount of
debt issued by the company in each year.
Answer for Question : 1C
Cash position of the company- The cash position of the company is not satisfactory. The
company has generated only 226 in cash flow from operating activities in 2006(E) despite
earning a net income of 1,534 in 2006(E). This has led to the negative change in cash of -
203 in 2006(E). Funding of investment – The Company is currently relying upon issuance
of debt to fund its investment. The company has issue debt of 2,006 in 2006(E) in order to
fund its investment of PP&E of -1,398. This might lead to the company being caught in the
debt trap. Instead, the company can use its accumulated profits and reserves to fund to its
investments.
Free cash flow –
Free cash flow (2006E)= Operating cash flow – Capital Expenditures
Free cash flow(2006E)= 226-1,398
Free cash flow (2006E)= -1,172
The free cash flow of the company in 2006(E) in negative because of the two factors,
namely increase in accounts receivable and increased investment in PP&E. The accounts
receivable increased by 4,185 which resulted in lower Operating Cash Flow and
increased investment in PP&E further reduced the free cash flow.
Question no: 2
Answer for Question : 2A
Operating Working Capital = Account receivable + inventory – Accounts Payable
(In $ thousand, some numbers are rounded)
2002 2003 2004 2005 2006E
Account Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,889 6,660 9,424
Operating Working Capital 4,540 4,227 5,122 6,917 8,894
Answer for Question : 2B
Operating Working Capital Ratio= Operating Working Capital /
Sales
(In $ thousand, some numbers are rounded)
2002 2003 2004 2005 2006E
Operating Working Capital 4.54 4.227 5.112 6.917 8.894
Sales 24.652 26.797 29.289 35.088 42.597
Operating Working Capital
Ratio 0.184 0.158 0.175 0.197 0.209
Answer for Question : 2C
DSO=
DIO= Inventory / Cost of good ssold per day
DPO= Accounts Payables / Csot of goods sold per day
(In $ thousand, some numbers are rounded)
2002 2003 2004 2005 2006E
Sales 24,652 26,797 29,289 35,088 42,597
Cost of Good Sold 20,461 21,706 23,841 28,579 35,100
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
DIO in number of days 54.35 46.36 48.33 41.42 39.45
DSO in number of
days 50.89 59.18 83.84 105.53 122.3
DPO in number of
days 35.79 49.32 73.97 83.84 96.66
Answer for Question : 2D
Base on the DSO and DPO computed, the days that the receivable are outstanding is
longer then the days payable are outstanding. In other words, its takes longers to collect
cash the to pay the suppliers. Because of this, it is possible that there will be a shortage of
cash to settle the current obligations.
Due ti the long credit period given to dealers by Ceres Gardeing Limited its Working
capital
requirement increased by more then 20% .
As the Days sales outstanding (DSO) increased to 122.3 Days on 2006(E ), the
accounts
receivable increased. This Increased account receivables which cash outflow
contributed
to higher working capital
requirement.
Question no: 3
Answer for Question : 3
Capital Employed= Fixed assets + Operating working Capital
Capital Invested = Shareholders Equity + Net Debt -
Cash
Economical Balance Sheet (In $ thousand, some numbers are rounded)
At December 31 2002 2003 2004 2005 2006E
Plant, Property, & Equipment
(net) 2,257 2,680 2,958 3,617 4,347
Other Assets 645 654 654 654 654
Land 450 1,750 2,853 2,853 2,853
Non- Current Assets 3,352 5,075 6,456 7,115 7,844
Account Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Account Payable 2,034 2,973 4,899 6,660 9,424
Opening Woking Capital 4,540 4,227 5,122 6,917 8,894
Capital Employed 7,892 9,301 11,578 14,032 16,738
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Current Portion of Long-Term Debt 315 352 525 730 649
Cash 705 1,542 1,818 2,158 1,955
Capital Invested 7,892 9,301 11,578 14,032 16,738
Question no: 4
Answer for Question : 4A
Variable Margin = ( Sales revenue - cost of goods sold) / sales
Operating Margin = Operating Income / sales
Return on Enquity = Net Profit / Owners
Equity
ROACE= Earning after tax before Interest / Average Capital Employed
(In $ thousand, some numbers are rounded)
2002 2003 2004 2005 2006E
Sales 24,652 26,797 29,289 35,088 42,597
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Earnings before Interest & Taxes 1,641 2,338 2,408 2,836 3,018
Interest 187 349 440 547 658
Earning Before Taxes 1,454 1,989 1,968 2,289 2,360
Taxes 264 696 689 801 826
Earning after taxes before Interest 1,344 1,520 1,565 1,843 1,962
Net Income 1,191 1,293 1,379 1,488 1,534
Capital Employed 8,282 10,491 12,872 15,460 18,043
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Variable Margin as Percentage 17.00% 19.00% 18.60% 18.50% 17.60%
Operating Margin as Percentage 6.66% 8.72% 8.22% 8.08% 7.09%
Return on Equity as Percentage 23.70% 21.23% 17.90% 17.85% 16.04%
Return on Average Capital
Employed as percentage 16.23% 16.19% 13.40% 13.01% 11.71%
Answer for Question : 4B
The trend in ROE from 2002 to 2006 (E ) show decreasing over the
year.
The reason for decrease in ROE is the decrease in performance of the operation of the
company.
The performance of operations of the company measured using Return on Capital
Employed (ROCE)
ROCE for the company is decreasing over
the years.
2002 2004 2005 2006E
ROCE = 22.29% 18.71% 18.34% 16.73%
Answer for Question : 4C
The trend in ROACE from 2002 to 2006(E ) shows Decreasing over year.
The Drivers for ROACE are Operating Margin and Efficiency. The reason for decreasing
ROACE is the decrease in operating margin of the company. Operating margin for the
company is decreasing over the year. On 2003 the operating margin was 8.72% and
2006(E ) is reduced to 7.09%
Answer for Question : 5
Pros-
1. Get Ceres programs helped company to increase the sales and profit.
2. Ger Ceres programs helped company to reduce the inventory holding periods thus
saving the cost on inventory storage. DIO changed from 54 days to 39 days over
the years 2002-2006.
Cons-
1. With GetCeres programs the cash flow from operating activity is decreasing as the
change in account receivable is increasing. To perform investing activities
company have to take debt and issue additional equity. This increases the debt and
interest expenses.
.
The program can be continued as it shows a sustainable and positive performance. As
observed in the financial analysis the Active Ratio of the programs shows positive result
as the company can effectively and efficiently leverage its resource. Moreover, its shows
that even with the existence of the project the company has enough liquidity to satisfy its
obligations and continue to operate. Most importantly, the programs has a high
probability of more increased sales in the future as it is already depicts 73% in its early
stage. However, the financial leverage show that there is too much debt outstanding and
most fund outsourcing is done through debt financing. This expose the company to high
risk of default that might become another drawback. Seemingly, Profitability ration show
that the company has less ability to earn income or sales from its own operations.
Overall, considering all the financial evaluation, the company should add additional
measures and extend policies in order to carry on and manage the program to maximize
potential for the company.
