Statement of Cash Flow
In 2003, the company exercised more financial prudence in its operating activities than in 2002. As a result, it was able to have more cash at its disposal for its own investments. The company had a lower accounts receivable in 2003, at $261,616 than in 2002, which had $315,960. This rate showed that the company was collecting is debt quickly. In terms on inventory, the company had $429,120 in 2003 and $768,900 in 2002. This rate showed that the company was not maintaining a lot of idle inventory in its shelves. Therefore, it was more liquid and had cash for investments. The company share of accounts payable increased from $437,535 in 2003 to $365,667 in 2002. This increase indicates that the business is retaining a high portion of suppliers’ cash for its own use. Generally, this indicates proper financial management since these funds can be used for other investments before they are used in paying suppliers. In 2003, the rate of depreciation was $120,000 while in 2002, it was $116,960. The increase in depreciation is in line with the company’s policy of increasing investments.
Cash flow From Investing
In 2003, the business slowed down its rate of investment in physical items, in particular the property, plant, and equipment. The business had spent $303, 863 in 2003 and $711,500 in 2002. Therefore, Caltron had more finance for investment in 2003 than in 2002, which it could use to promote its main activities.
Cash Flow From Financing
In 2003, the business increased its cash inflow from line credit. The business line of credit was $365,053 in 2003 and $310,582 in 2002. The business increase in long term debt during this period slowed. In 2003, it had an increase in long term debt by $135,320, while in 2002, this portion increased by 989,440. The reduction in the growth of long term debt aimed at ensuring the business had adequate finance for its operations.
The business current ratio decreased from 1.88 in 2001to 1.36 in 2002. This ratio then increased slightly to 1.39 in 2003. The increase in current ratio in 2003 indicated the business efforts of reducing its share of liabilities. Therefore, the business was becoming more liquid. However it was still below the industry’s average, which was 1.9. The cash ratio decreased from 0.38 in 2001 to 0.16 in 2002. It then fell further to 0.04 in 2003. This ratio indicated that the business was using its cash more on income generating activities. The industry average was higher, at 0.51.
The business annual receivable reduced from 10 in 2001 to 9.56 in 2002. It then increased to 32 in 2003. The increase in 2003 indicated increasing inefficiency in the business in debt collection. Carlton’s accounts payable increased to 85.68 days in 2003 from 17.54 in 2002. In 2001, this rate was 14.66 days. The increase in this rate indicated increased efficiency of the business since it was now retaining more of the suppliers cash, before it made payments
Cash Conversion Cycle CCC
The CCC reduced from 75.34 in 2001, then to 68.82 in 2002, and finally to 53.86 in 2003. The reduction in number of days in CCC indicated increased efficiency for the business, since it was now using less period between the times it bought inventories and when it made payments. Generally, this decrease in CCC was brought by an increase in average purchase days.
The fixed asset turnover fell slightly from 2.56 in 2001 to 1.93 in 2002. In 2003, this ratio increased to 5.18. The increase in 2003, showed that the company was utilizing its fixed assets better to generate income. Total asset turnover was 1.72 in 2001, it fell to 1.46 in 2002, and then increased to 1.72 in 2003. The increase in the asset turnover showed that there was increase efficiency.
The debt ratio increased from 0.35 in 2001, to 0.61 in 2002, and 0.75 in 2003. This increase indicate the company was becoming less solvent. In particular, it was an indication of increased dependency on debt. The debt to equity ratio increased from 0.54 in 2001 to 1.53 in 2002. It then increased to 2.98 in 2003. This rate also showed increased dependency on debt for the company, therefore, it was becoming less solvent. The time interest earned increased from 8.87 in 2001, to 3.06 in 2002. It then fell further to 1.03 in 2003. The decrease in insolvency indicated that the company was becoming more insolvent.
The gross profit margin increased 40% in 2001, to 39% in 2002, and 15% in 2003. This decrease was an indication of declining rate of return for each sale. The return on assets was 10.17% 2001 to 5.2% in 2002, and finally to 0.11% in 2003. The decline in this rate showed that the company was making less profits on its each asset. This decline was an indication of increased underperformance.
The Du Point analysis indicated that the company’s return on equity increased in 2003. The return on equity was 15.65% in 2001, then to 13.19% to 2001, and finally to 0.42% in 2003. The leverage was 1.54 in 2001, 2.53 in 2002, and finally to 3.52 in 2003. This rate indicated that the company was increasing its assets at a higher rate than equity. The asset turnover was 1.7 in 2001, 1.46 in 2002, and 1.94 in 2003. The increase in this rate in 2003 indicated that the company was have an increase in its sales.
Task 1, 2, and 3 are on Excel
- Caltron’s Statement of Cash Flow, based on the following:
- What is the largest use and the largest source of cash? What is happening within the company to make these the largest use and source of cash? Sales, are the largest sources of cash. Purchases is the largest use of cash. On overall, the increase in sales by the business is the leading cause of use of cash.
- What are the implications of what you have identified in Part A for Caltron? Link your analysis back to case facts where appropriate.
Basically, an increase in sales results in an increase in revenue and cash for Caltron. On the contrary, too much purchases results in a decrease in cash. Therefore, the company should purchase only the required and essential levels of cash to avoid liquidity problems in the business.
- Caltron’s liquidity, efficiency, solvency and profitability, based on the following:
- Which areas improve, or worsen, over time and compared to industry averages? Link your analysis back to specific case facts where appropriate.
The liquidity ratios for the company in 2003 were lower than those of the industry. The industry’s current ratio was 1.9 while the business had a ratio of 1.39. The industry’s cash ratio was 0.51 while Caltron had a ratio of 0.04. Therefore, the business was having difficulty in financing its projects.
On overall, the business had a less cash conversion cycle than the industry. Therefore, the company was able to finance its activities better than companies in this industry. Caltron CCC was 53.86 days while the industry was 75 days.
The business solvency was in adequate when compared with that of the industry. Its debt to asset ratio was 0.75 while the industry’s was 0.3. The time interest earned was 1.03 for Caltron while the industry was 14.63. This ratio indicated the company depended more on debt than other companies in the industry.
The company’s gross profit ratio was lower than that of the industry. Its gross profit margin was 15% while the industry’s was 42%. This ratio indicated the company was underperforming when compared with the industry’s performance.
- What are implications of this to Caltron? The company’s high dependence on debt had resulted in it having rates that indicated it was not solvent. The company’s profits margin had also decreased during this period.
- What recommendations do you have for the operations and management of Caltron going forward?
The company should reduce its depended on debt.
The company should increase its sales levels
The company should reduce its operation costs.
- Rationale for either approving or not approving the loan
The loan should not be approved. The current ratio for the company is 1.39, which is below the approved standard of two. In addition, the company is not solvent and has high risks of default. The solvency ratio for the business is 2.98 in the debt to equity ratio.
- Risks and implications of your decision to Caltron and/or the bank.
Issuing credit to Caltron may result in defaults and loss to the bank.
- Recommendations to Caltron for improving their financial situation going forward.
Caltron should encourage its customer to repay their debt in time. On its part, the company should request borrowers to extend their credit period. The company should also minimize its uptake of debt.