Name JATIN GUPTA
ANSWERS - 1
1A:
The anticipated cash flow from operations for 2006(E) is $ 226K, which indicates that
only 14.73% of the net income of 1,534 expected for that year will be converted to cash
flow from operations. Operating cash flow and Investing cash flow were the two sections
of the cash flow summary that made the biggest contributions to the decline in the change
in cash for the business between 2003 and 2006(E).
1B:
Year 2003 2004 2005 2006
Account
Receivables in -920 -2416 -3465 -4185
$ Thousand
The trends and the reasons are:
1. Operating activities: Trend is declining as a result of the company's rising Accounts
Payable & Receivable. The business may have sold more products or given its clients a
longer credit term, which both contributed to the rise in account receivables. The
business may have purchased more raw materials or received a longer credit term to pay
its vendors, which could have caused the accounts payable to rise.
2. Investing activities: Trend is decreasing as there is high cash outflows due to higher
investments in PP&E for the year 2005-2006(E)
3. Financing activities: Trend increased for the year 2003-2005 and then decreased in
2006 as the company acquired more debt and raised more money.
1C:
Cash Position of The Company:
The cash position of the company is not satisfactory. The company has generated only $
226K 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 Investments:
The company is currently relying upon issuance of debt to fund its investment. The
company was issued debt of 2,006 in 2006(E) 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 its investments.
Free Cash Flow:
Free cash flow 2006(E) = Operating Cash Flow - Capital Expenditures
Free cash flow 2006(E) = 226 - 1,398
Free cash flow 2006(E) = -1,172
The free cash flow of the company in 2006(E) is negative because of two factors, mainly
& 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.
ANSWERS - 2
2A:
Operating Working Capital = Account Receivables + Inventory - Accounts Payable
Year 2002 2003 2004 2005 2006
Accounts Receivable 3485 4405 6821 10286 14471
Inventory 3089 2795 3201 3291 3847
Accounts Payable 2034 2973 4899 6660 9424
Operating Working Capital 4540 4227 5123 6917 8894
2B:
Operating Working Capital Ratio =Operating Working Capita / Sales
Year 2002 2003 2004 2005 2006
Operating
Working 4540 4227 5122 6917 8894
Capital
Sales 24652 26797 29289 35088 42597
Ratio 5 6 6 5 5
2C:
DIO = Inventory/Cost of Goods Sold Per Day
Year 2002 2003 2004 2005 2006
Inventory 3089 2795 3201 3291 3,847
COGS/ Per Day
57 60 66 79 98
DIO 54 47 49 41 39
DSO = Account Receivables/Sales Revenue Per Day
Year 2002 2003 2004 2005 2006
Account
Receivable 3485 4405 6821 10286 14,47
4
Sales revenue per 68 74 81 97 118
day = Sales/360
DSO 51 59 84 106 122
DPO = Accounts Payable/COGS Per Day
Year 2002 2003 2004 2005 2006
Account Payable 2,034 2,973 4,899 6,660 9,424
COGS/ Per Day 57 60 66 79 98
DPO 36 50 74 84 97
2D:
The primary consequence would be a rise in running cash needs. The amount of cash the
business has on hand decreases as the credit period lengthens because more money is
locked up in inventory and accounts receivable. To pay for continuing costs, the business
would therefore require more operating cash.
ANSWERS - 3
3A:
Economic Balance Sheet for Ceres Gardening Company
At December 31 2002 2003 2004 2005 2006E
Capital Employed
Operating Working 4540 4227 5122 6917 8894
Capital
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Other Assets 645 645 645 645 645
Plant, Property, & 2,257 2,680 2,958 3,617 4,347
Equipment
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Land 450 1,750 2,853 2,853 2,853
Total Capital Employed 13,761 18,044 23,417 27,609 35,056
Capital Invested
Net Debt 2,868 3,211 4,433 5,696 7,175
Cash 705 1,542 1,818 2,158 1,955
Current Portion of Long- 315 352 525 730 649
Term Debt
Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Shareholders' Equity 5,024 6,091 7,146 8,336 9,563
Total Capital Invested 13,761 18,044 23,417 27,609 35,056
ANSWERS - 4
4A:
Note: Data represented are shown in $ thousand & rounded off
Variable Margin = (Sales Revenue – Cost of Goods Sold) / Sales
Variable Margin %(Year) 2002 2003 2004 2005 2006E
Sales Revenue 24,652 26,797 29,289 35,088 42,597
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Variable Margin 4,191 5,091 5,448 6,491 7,497
Variable Margin % 17.0% 19.0% 18.6% 18.5% 17.6%
Operating Margin = Operating Income or EBIT/Sales Revenue
Operating Margin % (Year) 2002 2003 2004 2005 2006E
Earnings before Interest & Taxes 1,641 2,338 2,408 2,836 3,018
Sale 24,652 26,797 29,289 35,088 42,597
Operating Margin % 6.7% 8.7% 8.2% 8.1% 7.1%
Return on Equity = Net Profit / Owner’s Equity
ROE % (Year) 2002 2003 2004 2005 2006E
Net Income 1,191 1,293 1,279 1,488 1,534
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Return on Equity % 23.7% 21.2% 17.9% 17.8% 16.0%
Return on Average Capital Employed = Adjusted Net Operating
Income / Average Capital Employed
RoACE (Year) 2002 2003 2004 2005 2006E
Adjusted Net 1,343.80 1,519.57 1,565.04 1,843.13 1,961.85
Operating Income =
EBIT * (1-(Tax/EBT)
Average Capital
Employed = ((CE at 8,282.00 79,386.5 11,681.40 14,165.60 16,751.47
beginning of year + CR
at end of year)/2)
RoACE = Adjusted Net 16.23% 16.19% 13.40% 13.01% 11.71%
Operating
Income/Average
Capital Employed
4B:
The Trend in ROE is Decreasing ,
Reason : Since the shareholders' equity increased between 2003 and 2006, the
company's return on equity has decreased, which is not good. In order to leverage its
finances, the company must borrow money from banks to achieve the best possible
leverage, which will reduce the shareholders' equity in order to maintain a healthy
balance between the bank and the shareholders.
Shareholders’ Equity : 5,024 | 6,091 | 7,146 | 8,336 | 9,563
ROE = PAT/ Equity x 100 (Increasing/Decreasing) Key Drivers of ROE
1. Operating Margin (EBIT/Sales)
2. Efficiency (Sales/CE)
3. Financial Leverage (CE/Equity)
4. Interest (EBT/EBIT)
5. Tax (PAT/EBT)
RoE Trend from 2002 to 2006E – It is decreasing overall for
the given period as mentioned below values.
ROE % (Year) 2002 2003 2004 2005 2006E
Return on Equity % 23.7% 21.2% 17.9% 17.8% 16.0%
4C:
The RoACE Trend, is unchanged since 2003, and the sources of the operating margin
ratio are the company's profits, which are measured by EBIT/ (1-T)*100 efficiency. The
profits after taxation and before interest will be calculated as follows: (capital employed
starting + capital employed ending)/2 This is the company's RoACE, which is rising
and reflects the effectiveness of the business.
Key drivers of RoACE is
1. Operating Margin (EBIT/Sales)
2. Efficiency (Sales/CE)2002 :
2002 2003 2004 2005 2006
6.60% 8.70% 8.20% 8% 7%
ANSWERS - 5
5A:
Pros of the Get Ceres Program:
1 - Purchases of the Get Ceres programme rose from $35.1 million in 2005 to $42.6
million in 2006, with dealers accounting for about 80% of all purchases.
2 - The company was very pleased with its financial performance, with the breakeven
point being reached at about $30 million in sales using the existing cost structure.
Cons of the Get Ceres Program:
1 - Despite the dealers being offered payment conditions, the clients' payment was
delayed by 120 days, which had a significant impact on the company. Many dealers did
not get paid until the merchandise was delivered.
2 - The sellers were hesitant to increase the price of the organic seedling because doing
so would lock up even more money in inventory.
Recommendations:
The Get Ceres programme's concept is sound, but I would not advise sticking with it
over the long haul because it will force the company to pay higher interest rates,
which will negatively impact its profit margins and cause its account receivables to
rise. As a result, the company will suffer a significant loss.
