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Guna Fibres Case Summary

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Q1: Why has Guna run out of cash? (Using the net profit as a percentage of sales, gross margin, operating expenses, interest expense, dividend payment in past year and in 2012 in Exhibits 1 and 5 to backup your analysis). Guna Fibres, Ltd. has run out of cash simply because of poor management and they don’t have an adequate amount of cash flow from operations. Guna does not have enough cash to support day-to-day operations and has become very dependent on a line of credit. As seen on the income statement, their increasing operating expenses, increase in costs of goods sold, and increase in interest expense, Guna Fibres, Ltd. is no longer able to remain solvent. Among other reasons, such as large dividend payouts and too much inventory on hand, Kumar needs to be more aware of her decision making to change her current financial practices.…show more content…
In this two-year period, gross sales had a 17% increase while COGS increased by about 21%. If this rate keeps up, Guna can be sure to have a negative net profit in the coming years. So, despite their growth in sales from 2010 to 2011, Guna’s net profit decreased by an almost 30%. That is a significant drop relative to their increase in sales. By looking at the net profit as a percentage of sales, in 2011 the net profit was only 3% of sales as compared to about 6% in 2010. This should be a big concern and a cause for
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