Finance Case Study Example | Topics and Well Written Essays - 1500 words

Finance - Case Study Example Relatively tough economic environment. Economic conditions do not seem to be favorable as the overall industry dynamics may not allow the firm to expand at a rapid pace. With overall low prices, it may seem difficult for the firms to actually maintain their margins and effectively generate sufficient cash flows to service their debts. 2. Higher volume of business with limited capacity to meet the demand. It is also critical to note that though business is expanding, the overall capacity to meet this demand is limited. In order to expand meeting the demand, firm, however, has to borrow indicating that its own equity may be low; therefore, the firm’s own internal stake will be limited. It is critical that the capacity should be expanded with higher contribution from the owners with less reliance on debt. 3. Not professionally managed as firm is still a family business. Business does not seem to be run professionally as despite growing, firm has not been able to expand profession ally. The legal character of the firm is still same to be managed by the two individuals with little hiring except drivers. In order to manage the business, marketing side of the business must be delegated to professionals who can better run the firm and let the owners focus on the expansion of business. Analysis Ratio Analysis A closer look at the return on equity would indicate that for year 2002, ROE is higher than the industry average. However, it was lot lesser than the industry average in 2000 and 2001 suggesting that the firm has been able to increase its ROE. However, owners’ capital has remained constant during the period with increasing long term liabilities. ROE can increase due to higher level of debts and it seems that this large increase in ROE during 2002 is also the result of higher level of debt. Overall debt to equity is higher than the industry; however, interest coverage has increased too during last few years. Firm seems to be liquid as its current and ac id test ratios are higher than the industry average, however, higher liquidity position can be due to higher accumulation of accounts receivables on the balance sheet of the firm. Firm needs to improve its collection policy because higher investment into working capital is also a cost and it is a non-productive asset. Efficiency seems to have improved over the period of time as firm’s receivables in days have consistently been reduced. It is, however, important to note that account receivables are on rise which has basically inflated the liquidity position of the firm. Sales and assets growth has been high too, however, asset growth seems to be due to higher cost of the capital expenditure done. Sales have increased too but this increase has been mainly due to business given by one customer. Sales growth in 2001-2002 has been 29.5% down from 219%, however profit has shown an explosive growth. Statement of Changes Sources of Cash Short term Long Term Other Receivables 51.00 Pr epaid Expenses 935.00 Accounts Payable 17,322.57 Loan 30,000.00 Loan 270,000.00 Retained Earnings 58,750.96 Tota Sources 18,308.57 358,750.96 377,059.53 Uses of Cash Accounts Receivables 17,719.31 Net Fixed Assets 270,000.00 Total Uses 17,719.31 270,000.00 287,719.31 89,340.22 Cash Dec 2002 4,230.00 Cash Dec 2003 93,570.22 4Cs of Credit The loan will be collateralized