Name NEELAPANDIAN K
Question 1
The major contributor to the decrease in 'change in cash' is likely cash flow from
investing activities, specifically due to significant investments in land and property
between 2003 and 2006(E)
Operating Activities: Cash flow fluctuated, with increases in accounts receivable
reducing the cash available despite rising profits. The extended payment terms
from the GetCeres™ program were a key factor.
Investing Activities: Cash outflows increased due to significant investments in
land, property, and equipment, reflecting business expansion.
Financing Activities: Cash inflows increased as the company relied on long-term
debt and extended vendor financing to support its growth strategy.
This analysis illustrates the impact of business decisions on the three main categories of
the cash flow statement
Self-Financing of Investments: Limited, as the company is relying on external
financing due to insufficient cash flow from operations.
Funding of Investments: Primarily through long-term debt and vendor financing.
Cash Position: Slightly declining, indicating potential future liquidity constraints due
to significant investments and growth in working capital.
Question 2
To calculate the Operating Working Capital (OWC) of Ceres Gardening Company for
2002 to 2006(E), we use the following formula:
Operating Working Capital=(Accounts Receivable+Inventories)−Accounts Payable
Summary of Operating Working Capital (OWC) from 2002 to 2006(E):
2002: $4,540,000
2003: $4,227,000
2004: $5,123,000
2005: $6,917,000
2006(E): $8,894,000
The company's operating working capital increased steadily over the years, reflecting
the company's growth and higher investment in inventories and accounts receivable,
partially offset by increased accounts payable.
To calculate the Operating Working Capital to Sales Ratio for Ceres Gardening
Company from 2002 to 2006(E), we use the formula:
Operating Working Capital to Sales Ratio=Operating Working Capital (OWC) / Sales
Summary of Operating Working Capital to Sales Ratio:
2002: 18.42%
2003: 15.77%
2004: 17.49%
2005: 19.71%
2006(E): 20.88%
Summary of Calculated Metrics:
DIO DSO DPO
Year (Days) (Days) (Days)
2002 54.8 51.6 36.3
2003 49 60 49.7
2004 49 85 75
2005 42 106.6 85.1
2006
E 40 124.4 97.2
while the long credit period to dealers can stimulate sales and enhance dealer
relationships, it significantly increases working capital requirements due to higher
accounts receivable. This can lead to cash flow challenges and greater financial leverage,
ultimately affecting the company’s liquidity and operational flexibility. Careful
management of these dynamics is crucial to ensuring that growth does not come at the
cost of financial stability.
Question 3
Summary of Economic Balance Sheet
Ceres Gardening Company 2006
Assets
Current Assets
- Cash $1,955,000
- Accounts Receivable $14,471,000
- Inventories $3,847,000
Total Current Assets $20,273,000
Non-Current Assets
- Plant, Property & Equipment $4,347,000
- Land $2,853,000
- Other Assets $645,000
Total Non-Current Assets $7,845,000
Total Assets $28,118,000
Liabilities
Current Liabilities
- Accounts Payable $9,424,000
- Current Portion of Long-term Debt $649,000
Total Current Liabilities $10,073,000
Long-Term Liabilities $8,480,000
Total Liabilities $18,553,000
Equity $9,563,000
Capital Employed $18,045,000
Conclusion
The economic balance sheet shows that Ceres Gardening Company has total assets of
approximately $28.12 million, with total liabilities of around $18.55 million, leading to a
capital employed of about $18.05 million. This indicates a sound balance between
equity and debt, reflecting the company's capacity to fund its operations and growth.
Question 4
Analysis:
ROCE showed a peak in 2003 but experienced a downward trend afterward,
similar to the operating margin.
Reason for Change:
The increase in ROCE in earlier years may be due to efficient capital utilization
and growing sales. The subsequent decline suggests that increased operating
expenses and challenges in maintaining sales growth affected profitability
relative to the capital employed.
Conclusion
Variable Margin: Improved initially but declined due to rising COGS.
Operating Margin: Increased with better cost control but declined as expenses
rose with expansion.
ROE: Declined due to stagnant net income growth compared to rising equity.
ROCE: Followed a similar trend to operating margin, reflecting challenges in
capital efficiency and rising expenses.
Overall, while Ceres Gardening Company showed promising growth in earlier years, it
faced increasing pressures on profitability and margins as it expanded, highlighting the
need for careful cost management and strategic pricing to sustain its competitive
advantage.
Trend in ROE from 2002 to 2006(E):
2002: 23.67%
2003: 21.22%
2004: 17.91%
2005: 17.84%
2006(E): 16.05%
Reason for Decrease in ROE:
The decline in ROE reflects stagnant net income growth relative to rising shareholders'
equity due to increased capital investment and lower operational efficiency.
Trend in ROACE from 2002 to 2006(E):
2002: 32.7%
2003: 38.4%
2004: 33.8%
2005: 34.3%
2006(E): 31.6%
Reason for Decrease in ROACE:
The decrease in ROACE reflects rising operating expenses and reduced operational
efficiency, which outpaced revenue growth, leading to lower returns on capital
employed.
Question 5
Pros of the GetCeres™ Program:
1. Increased Sales Volume:
o By offering attractive payment terms and discounts, the program
encourages dealers to stock more products, leading to higher sales
volumes and market penetration.
2. Enhanced Dealer Relationships:
o The program fosters strong relationships with dealers by providing
financial incentives, which can improve loyalty and long-term
partnerships, resulting in repeat business.
Cons of the GetCeres™ Program:
1. Higher Accounts Receivable:
o The extended credit terms lead to increased accounts receivable, tying up
cash that could be used for operational needs or investments, potentially
straining liquidity.
2. Risk of Overextension:
o Dealers may become reliant on the program, leading to increased risk if
the program is modified or discontinued. This could negatively affect
sales if dealers are unable to manage inventory effectively.
Recommendation on Continuing the Program:
Recommendation: Yes, I would recommend continuing the GetCeres™ program, but
with adjustments.
Justification: While the program boosts sales and strengthens dealer relationships,
Ceres should implement tighter credit controls and monitor inventory levels to mitigate
liquidity risks. Adjusting the program to balance growth and financial health will ensure
sustained benefits without compromising cash flow.
