Introduction:

I am Dan O’ Shea, a corporate finance consultant with KPMG, I have compiled the
enclosed appraisal report on Caltron Ltd. This report has been customized for your business to
provide you with analysis that will enable you to measure the company’s performance overtime,
and evaluate the progress of your business. Our goal was to look over the income statement,
conduct specific ratios to explain the profitability, liquidity, asset management and long-term
debt paying ability of the business.
I am writing this report to Pulse’s board of directors informing them of my findings in
respect of Caltrons performance over the last three years and an evaluation of Jacobs- Jones
performance while recommending the future of Caltrons.

Critical Success factor:

LIQUIDITY
Ratio Target 2003 2002 2001
Current Ratio 2.7 1.39 1.82 2.99

Although Caltron was able to improve operations and increase sales, by the installations of new
equipment. However, it was unable to generate sufficient current asset to cover accounts
payables, Line of credits and current portion of long term debt outstanding. The ability of current
asset to satisfy short term liabilities was hampered by the fact that an increasing portion of sales
was sales on account/ Credit. Therefore, cash inflow was restricted.
Due to low rate of cash inflow, Caltron had to borrow more, causing their line of credit to be on
the high. Caltron current ratio as seen above also declined because insufficient cash was
generated to cover the current portion of their long-term debt, therefore every year the current
portion on their long-term debt increased.
Accounts Payables, short term investment and Inventories

Ratio Target 2003 2002 2001

Cash Ratio 0.45 0.04 0.01 0.81

Caltron decision to sell off their short-term investments, and invest in long term assets such as
equipment, introduction of high automated factory and expansion programs, caused them to have
on hand limited cash to pay suppliers and to pay back loans.

Ratio Target 2003 2002 2001

Inventory Turnover in Days 60 days 108 days 109 78

The improved efficiency of the manufacturing segment overwhelmed Caltrons storage capacity.
The above calculated ratio reveals Caltrons was unable to satisfy its dispatch expectations of the
finished goods. Poor inventory and supply chain management resulted in increase in finished
goods inventory. This was further compounded by their failure to match sales with components
from overseas suppliers.
 Ratio Target 2003 2002 2001
Accounts Receivable Turnover in 32 days 47 44 37
Days

In Caltron attempt to increase sales, Caltron suspended their 30 days account receivable
collection. As a result of this, The number of days, accounts receivable outstanding increased
steadily. therefore, it is taking them longer times to collect cash to run the business.

Ratio Target 2003 2002 2001

Accounts Payable Turnover in days 15 days 59 43 22

The time taken to pay supplier of goods and persons or organizations who render service to
Caltron has increased due chiefly to the fact that the inflow of cash, is insufficient, this is also as
a result of cash equivalent (Short term Investment) conversion was used in the acquisition of
capital asset and inventory.

Ratio Target 2003 2002 2001

Cash Conversion Cycle 77 days 95 110 93

The cash conversion cycle has made no improvement due to the fact that accounts receivables
are not been collected in a timely manner because in an effort to generate sales the company has
cancelled it 30days collection policy. In view of this Caltron is unable to generate the desired
sales as reflected in their increasing inventory turnover days.
PROFITABILITY

Ratio Target 2003 2002 2001

Gross Profit Margin 22.00% 15.00% 16.00% 18.00%

Caltrons gross margin steadily decreased due to their low sales turn out and the high direct labor
cost incorporated into the cost of goods sold. This is because the automation system didn’t cause
any significant reduction in cost of goods sold and direct labor cost remained the same.

Ratio Target 2003 2002 2001

Operating Profit Margin 13.00% 3.25% 3.72% 9.36%

Increased spending on equipment and training resulted in increased operating expense, therefore
operating margin declined steadily over the period under analysis.

Ratio Target 2003 2002 2001

Net Profit Margin 6.00% 0.06% 0.58% 4.85%

From the analysis of the financial statement, the net profit margin declined from 2001-2003, due
to spending on equipment, training of workers, unchanged high wages, and increased interest
expense on loans.

Ratio Target 2003 2002 2001

Return on Assets 15.00% 0.11% 0.98% 8.58%

Caltron’s return on asset is decreasing because they are not generating the sales on the
investments they made. Sales figure should have been higher based on the fact that they have
made significant investment in equipment and inventory.

Ratio Target 2003 2002 2001

Return on Equity 25.00% 0.64% 4.54% 21.69%
Shareholders equity is declining because of the increase expenditure on capital equipment, raw
materials, cost of holding finished inventory, training, increase in labor cost and selling and
administrative cost.

Problems
In this case there are specific issues that are responsible for the unstable operations in Caltron ltd.
In view of this I have identified reasons that directing impact the company’s management and
day to day activities. The below issues are constitution factors:

Poor Financial Performance

Caltrons decisions under the leadership of Kyla Jacob jones, to focus in increasing sales and
dusting the surface of the company’s reputation lead the company’s fall in generating revenue.
This management Mis-placed priority made them incurred liabilities beyond their income
capacity. The company’s failure to enforce the accounts receivable collection policy limited
them from fulfilling obligations from accounts payable. Retailers and wholesalers took
advantage of this gap and held back payments to Caltron, causing them to undertake loans for
running the business there by steadily increasing their line of credit.

Poor Operational Processes.

The overwhelming output of Caltrons new production equipment installed revealed their
inabilities to handle and organize the business activities. Initially, the key reason for the purchase
of an automated factory plant was to reduce the cost of labor and be competitive with the
industry trend.
However, this goal was defeated when the automated equipment still required labor to operate.
The demand and supply chain department of Caltron also failed to plan and develop a dispatch
plan that will avoid the holding of finished goods. This hiccup without a doubt will cause delays
and operations backlogs for other processes that need to be completed.

Competition from Low- wage developing countries.

Expensive Unionized Workforce.