CASH FLOW STATEMENT ANALYSIS
Operating Activities
Caltron Ltd has been unable to develop the necessary income from operating activities due to competition from foreign countries which has made other purchasers more inclined to cheaper calculators. The company is trying to salvage its reputation and remain in the microcomputer industry. They have added new production systems and machines with a high installment cost. The company had to employ more sales and administrative for more services and they were less competent, which is rendering to poor performance.
Financing Activities
The organization's income demonstrates negative profit streams from financing activities. The new rule of extra charge on interest was to condense the rate of repayment charges which as on terms of 2/10 and increase sales. This should imply that the organization is utilizing its money generated from operating activities to pay off its obligations. The negative income from financing exercises shows the business is encountering troubles during the time spent developing.
Investing activities
The company has invested on purchase of plant, property and equipment. The spending in 2002 was slightly higher with (7.11m) dropped to (3.03m) and has a negative cash flow from investing activities. This shows that the business is still growing and it is investing in new assets to do so.
RATIO ANALYSIS:
LIQUIDITY
Current Ratio:
The current ratio has decreased since 2001. From 2.99 to 1.39. This shows that the company became less able to pay off their liabilities. However, 1.39 is still positive to pay off debts, it is below the industry average of 2.7, which is worrisome for investors.
Cash Ratio:
A cash ratio of 0.01 indicates an extremely low cash ratio as industry average is at 0.45. The firm has low liquidity. Caltron Ltd has recently invested in some new equipment which decreased the cash ratio and increased the property, plant and equipment by more than double since 2001.
Alternative 1:
Reduce sales force. This alternative will reduce expenses to pay their salaries. Currently, Caltron Ltd is operating by paying sales people a salary and expanding their sales force. This poses a risk to the profitability of the business. By reducing the amount of sales and administrative staff Caltron Ltd will be able to recover their investments sooner.
Alternative 2:
Sell equipment. Most organizations have unproductive assets on hand. A quick way to generate some extra cash in the firm would be to sell as much as possible.
ASSET UTILIZATION
Inventory Turnover:
Inventory turnover in days has increased from 78 days in 2001 to 108 days in 2003. The industry average for inventory turnover shows 60 days. Caltron Ltd is almost double the industry average which is evidence that there may be older units still on hand.
Account Receivable in days
An increase by 10 days over the past 3 years. From 27 days to 47 days. The industry average is 32 days and Caltron Ltd has increased their accounts receivable in days which shows that they are becoming less able to recover their outstanding collections from their clients. There is also a possible indication of bad debt here if clients were unable to pay Caltron Ltd.
Accounts Payable in days
The accounts payable in days account has increased from 2001 to 2003 by 38 days. In 2001, 22 days to pay accounts, 2003 took 60 days. This is an indication that Caltron Ltd is less able to pay off their debts. Industry average is 15 days. Caltron Ltd does not have enough liquid to pay off their accounts appropriately.
Cash Conversion Cycle
2003: 95 days
2001: 93 days
Overall the cash conversion cycle is declining. It is 22 days over industry average of 77 which is an indicator of declining performance.
Fixed Asset Turnover and Total Asset Ratio
Total Asset Ratio: 2003: 1.72
2001: 1.77
Fixed Asset Ratio: 2003: 5.18
2001: 5.4
Total assets have had a slight decrease of .05. This is much below industry average of 2.5. It indicates that the firm is unable to effectively utilize its assets.
Alternative 1:
Negotiate for longer payment periods and recover outstanding debt. Caltron Ltd must try to chase as many outstanding payments as they can to increase their assets. Also, negotiating to have some vendors give discounts when they make an early payment could improve accounts receivables in days. Utilizing a deferred payment plan could improve accounts payables in days. This would rearrange the expenses and soften the impact of large purchases on the bottom line.
Alternative 2:
Lease assets instead of purchasing. Leased equipment does not count as a fixed asset and will improve the ratios.
Alternative 3:
Increase revenue. Caltron Ltd could increase its asset turnover ratio by moving their products more quickly and having some promotions to draw attention. The assets may be used properly but sales could be slow, which results in a low turnover ratio.
DEBT UTILIZATION
Debt Ratio
2003: 75%
2001: 42%
The industry average is 40%. The increase in debt ratio shows that the company is not leveraged. It is vulnerable to major debt problems like bankruptcy and high interest costs.
Times Interest Earned
2003: 1.03
2001: 7.3
The company is no longer generating enough cash from to pay off interest obligations. Industry average shows that companies are paying off interest 8 times, while Caltron Ltd is only paying it off once.
Alternative 1:
Sell the business. Selling Caltron Ltd is a viable alternative in this situation as it is showing a decline amongst its competitors in most aspects of the analysis. The expenses are increasing year over year and sales revenue inflow is not showing a comparable increase. The company is becoming exposed to a high risk of bankruptcy. For potential investors, these are indications of serious problems ahead.
Alternative 2:
Restructure debt. Negotiating with creditors to reduce their debt in exchange for equity in the company. This is a preferred method over filing for bankruptcy due to the distress of the company. However, it could lead to the company being taken over by its shareholders.
PROFITABILITY
Gross Profit Margin:
2003: = 15%
Net Profit Margin
2003: = 0.06%
ROA:
2003: = .11
ROE:
2003: = 0.42
The factors that come into play after comparing and contrasting Caltron Ltd.’s profitability ratios against the industry average are dramatically below industry average. This is concerning for possible future investors and current stakeholders. The returns have dropped significantly since 2001. This shows that since leadership was transferred to Kyla Jacob-Jones, the company is close to spending more than they are earning and margins are becoming tighter.
Alternative 1:
Find new customers and maintain the old. Using a new marketing technique could improve sales and bring in new clients. Maintaining a good relationship with repeat customers is important to the profitability of the company as they can give referrals. Consider a referral program.
Alternative 2:
Increase the productivity of staff. Caltron Ltd’s administrative offices were not highly automated. New administrative equipment could improve efficiency and overall customer satisfaction.
CONCLUSIONS:
Overall, Caltron Ltd is not in a secure financial position. Action must be taken to improve the company’s current financial health and long term survival. Management must address the issues found in the areas of liquidity, profitability, solvency and efficiency. Currently, the company is not favourable to investors due to its inabilities to pay off debts and lack of returns.
RECOMMENDATIONS:
- Caltron Ltd should no longer employ Kyla Jacob-Jones. One of the criteria for Kyla to continue working at Carlton Ltd was to improve its financial health. In turn, she increased expenses and decreased net income. The heavy investments in new PPE has increased interest and made the company less solvent. There has been minimal steps taken during her role as CEO.
- Increase marketing efforts to attract new business. A focus on a new marketing strategy could separate Caltron Ltd from its competitors. It is a loyal North American business so it is able to offer a unique quality and could attract a niche market.
- Reduced labour rates to improve efficiency. Caltron Ltd has diluted the sales and administrative staff with a lack of proper equipment. The business should reduce their salary based staff and improve their efficiency amongst the remaining. Upselling and bundle deals could improve the units per transaction and overall improve the profitability of the company.
- Adequate funding. A recurring problem found within Caltron Ltd was its inability to pay off debts. The company should consider a method such as a deferred payment plan. This could mitigate the impact on current liabilities and decrease interest. Offering discounts to early payers will add incentive and improve receivables.
The best solution would be to reduce labour rates and improve efficiency. Caltron Ltd is has a steep decline in it’s asset utilization year over year and returns on equity, partly due to high sales and administrative expenses. Since investing into new property, plant and equipment, Caltron should be aware that it needs to recover the investment as soon as possible. To do so, it must downsize other expenses to keep a positive trend. The new equipment will be an asset to the organization and improve efficiency which will soften impacts on the reduced labour force. Overall, customer and shareholder satisfaction should increase.
APPENDIX A
Current Ratio:
2003: 2,672,775/1,924,437= 1.39
2002: 1914520/1054189= 1.81
2001: 1,124,000/375,650= 2.99
1.39-2.99 = (1.6)
Cash Ratio:
2003: 24,000/1,924,437
= 0.01
2002: 10,000/1054189
=0.01
2001: 9000/375,650
= 0.02
Inventory Turnover:
2003:
= Inventory/COGS * 365
= 1,716,480/5,825,900 * 365
= 108 days
2002: = 1287360/4308192*365
= 109 days
2001:
= 518,460/2,422,280 * 365
= 78 days
Accounts receivables in days:
2003:
= Accounts Receivable/Sales * 365
= 878,776/6,854,000 * 365
= 47 days
2002: 617160/5128800 *365
= 44 days
2001:
= 301,200/ 2,954,000 * 365
= 37 days
Accounts Payable in days
2003: = Accounts Payable/ COGS * 365
= 948,802/ 5,825,900 * 365
= 60 days
2002: 511,267/ 4308192 * 365
= 43 days
2001:
=145,600/ 2,422,280 * 365
= 22 days
Cash Conversion Cycle
2003:
CCC = 108+ 47- 60
= 95 days
2002:
CCC = 113 days
2001:
CCC= 78 +37 - 22
= 93 days
Total Asset Ratio
2003: = 6,854,000 /3,995,978
= 1.72
2002: 3053860/2054189
= 1.49
2001: = 2,954,000/ 1,668,800
= 1.77
Fixed Asset Turnover
= Sales/Net Fixed Assets
2003= 6854000/1323203
= 5.18
2002= 5128800/1139340
=4.5
2001= 2954000/544800
=5.4
Debt Ratio
2003: = Total Liabilities/ Total Assets
= 2,992,097 / 3,995,978
= 75%
2002= 2054189/3053860
=67%
2001: = 699,082/ 1,668,800
= 42%
Times Interest Earned
2003: =EBIT/ Interest
= 222,700/ 215,683
= 1.03
2002: 190,768/140,847
=1.35
2001: 276,500/37,875
= 7.3
Gross Profit Margin:
2003: = GP/ Sales
= 1,028,100/ 6,854,000
= 15%
2002: 820,608/5128800
= 16%
2001: 531720/2954000
= 18%
Net Profit Margin
= Net Income/ Net Sales
2003: 4210/ 6,854,000
= 0.06%
2002: 29,953/5128,800
= 0.58%
2001: 143,175/2954000
=4.85%
ROA:
2003: 4210/3,995,978
= .11%
2002: 29953/3053860
= 0.98%
2001: 143,175/1,668,800
= 8.78%
ROE:
2003: 4210/1,003,881
= 0.42
2002: 29953/999,671
= 2.99
2001: 143,175/969718
= 14.7
APPENDIX B