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
Various ratios are used in this analysis. The organization’s WIP and FG inventory turnover ratios from 2009 demonstrate that the firm takes fewer days to sell both inventories (3.64 days and 73.43 days respectively) than the average firm in the industry In 2009, the total asset turnover ratio for Gemini Electronics was 1.37 while the industry average was 1. This is an indication that Gemini Electronics is generating business at a steady pace. Gemini Electronics is utilizing its fixed assets at a higher rate than other firms in the industry. Their utilization shows the Gemini’s ability to use L, P, & E in order to generate sales. Gemini Electronics A/R is 40.16, which is 25% higher than the industry average. This means Gemini Electronics waits about 40 days to receive payment for goods sold. High levels of A/R can negatively affect the firm and their stock
In Be Our Guest, Inc.’s scenario, we can see that the total cash flow from operations increased from 1995, $168,000, to 1997, $229,000, by 37%. This increase to the CFO is a result of a few different accounts. Although net income decreased 22.8% from 1995 to 1997, because depreciation increased 25.8% from 1995 to 1997, the total net income adjusted for non-cash charges increased by 4% from $250,000 to $259,000, from 1995 to 1997. The changes to Accounts Receivable over the years reduce cash flow from operations by $75,000, $46, $42,633 in 1995, 1996, and 1997, respectively. These increases in accounts receivable cause the cash flow from operations to decrease because Be Our Guest, Inc. collected less money from their customers compared to the sales. Whereas, the changes in Accounts payable & accruals of, $5,768, $19,063, and $14,859, in 1995, 1996, and 1997, respectively, caused the cash flow from operations to increase because Be Our Guest, Inc. is paying their suppliers less, indicating they are retaining more cash for
Measuring the liquidity through the current ratio, with 2.74 in the year 2009,0.74 above the standard, with the decline in the following year meeting exactly the standard at 2% in the year 2010, and a steep decline in the year 2011-2012 as compared to its standard.Resulting in the decline in firm’s ability to meet its day-to-day operating expenses. The current liabilities from 2009 to 2012 have increased by 27.03 billion whereas the investments in current assets have increased just by 26.09 billion, which causes the decline in the current ratio. To cope up with this problem the company should invest more in current assets and should reduce its current liabilities.
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
This company has a large amount of assets, they total out at about 124,213. They have more assets than actually cash on hand. This company has no short-term debt, the only debt they have is short-term. There is a section called other assets this, has increased by a lot. The fixed assets have increased by a lot in this company.
Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. Current ratio and quick ratio are really low and have been decreasing. For 1995, the current ratio is 1.15:1, which is less than the industry average of 1.60:1, however to give a better sense of where this stands in the industry, as seen in exhibit 3, it is actually less than the average of the bottom 25% of the industry. The quick ratio is 0.61 is less than the industry is 0.90. Both these ratios serve to point out the lack of cash in this company. The cash flow has been decreasing because, it takes longer to get the money from customers, but the company still needs to pay for its purchases. Also, the company couldn’t go over the $400,000 loan limit, so they were forced to stretch their cash.
This statement is used to report cash payments and cash receipts of an organization’s during a certain period. During 2015, the Group had operating free cash flow amounting to 606 million euros, versus a negative 164 million euros a year earlier (Air france-klm group, 2016). The statement displays the relationship of the net income to the changes in the cash balances. It is important to understand that cash balances can wane despite and increase in net revenue or vice versa Horngren, 2014, p. 674). The statement also aids in the evaluating management’s use of cash and management’s generation, defining a company’s capability to pay dividends and interest to pay debts when the time comes to pay them, and forecasting upcoming cash flows (Horngren, 2014, p. 674).
By dividing net sales by net fixed assets, an investor can see if the company is using its fixed assets efficiently. Since fixed assets are often high price items, it is important that a company is using the fixed assets well; the higher the ratio, the better. Since we are lacking information on what type of industry this is, it is hard to put to much significance on the ratio. Since the ratio is similar, even a little higher, than the competitor, it could be safe to say that this is normal for the
During the last eight quarter, debt to assets ratio increased from 62% to 68% and the reason for that is because the total assets have decreased from $12.3 billion to $9.7 billion. Total liabilities have decreased as well from $7.6 billion to $6.6 billion. Even though both assets and liabilities decreased, assets decreased by much high percentage than liabilities did. For the last six quarters, the times interest earned ratio was negative which means that the EBIT was negative. Along with that, the EBIT is decline more and more every quarter. During the third quarter in 2011, EBIT was -$171 million and during the fourth quarter in 2012, it was -$745 million. Overall, both liquid and leverage ratios indicate the financial health of the company is declining. Company is losing assets (mostly cash) and they are not as liquid as they used to be. The assumption is that the company will be out of cash by the end of 2013.
Financial analysis -net revenue grew in 2013 and declined 2014 to 2015. Net revenue declined approximately 15% in 2015. The main reason causing this decline is the increase in fixed assets over one year, meaning, the company’s assets were just sitting idle. After ROA declined in 2015 (company is not profitable) it does appear that it is increasing by 4% in 2016 due to rebranding of products.
InJanuary and October, Timmy is facing the problem of negative net cash flow, i.e.-£2400 ad -£7300, respectively. Quarterly bills payment are causing this problem during these months, as a result of which cash inflows are lower than cash outflows. However, Timmy can eliminate this problem in the future by reducing costs, increasing sales, and seeking for bank overdrafts(Ljubić, Mrša and Stanković, n.d.).