Name AISHA CININTYA, S.E.

Question 1

Question 1A:
The company’s profits have increased by ~30% from 2002 to 2006(E). How much of the
profits estimated for the year 2006(E) will translate to the 'cash flow from operations' for
the same year?
Which of the three categories in the cash flow statement has contributed majorly to the
decrease in the 'change in cash' by the company from 2003 to 2006(E)?

Answer 1A:
According to the data, The estimated profit for 2006E is 1534. A non-profit is the
different between the income and expenses that a company has earned over the years,
whether cash or not. However, the cash flow statement shows the amount of cash
generated by the company from net income. The amount of cash activity generated from
cash flows from operating activities is 226,000.

Investing cash flow is a major factor for the decline in the company's “change in cash”
since 2003 - 2006 (E).
The company's cash flow statement shows that total cash generated since 2003 has
decreased. These seasons of decline are heavy investments in fine assets and long-term
proceedings.

Question 1B:
What is the trend in cash flow from 'operating activities', 'investing activities' and 'financing
activities' over the years?

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Identify at least one reason for the increase/decrease in each of the three categories of the
cash flow statement. Explain your answer.

Answer 1B:
 Cash flow from “operating activities” has been on a downward trend from 2003
to 2006 (E).
 The reason is because there is an increase in Account Receivables as shown below:

Year 2003 2004 2005 2006

Account
Receivable -920 -2416 -3465 -4185
($ thousand)

 The trend in “Investing Activities” decreased from 2003 to 2006 € (as shown
below)
 The reason is due to investment in tangible asset as Property, Plant, Equipment
and Investment in Land.

Year 2003 2004 2005 2006

Investment in
Property, Plant -835 -734 -1215 -1398
and Equipment
Investment in
-1300 -1103
Land

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  The trend in “Financing Activities” is persistent.
 The reason is because that retirement of debt and dividends are about the same so
there is no major change in the Financing Activities as shown below:

Debt Issuance 1,494 1,850 2,128 2,006

Retirement of
-315 -352 -525 -730
Debt
Dividends -226 -224 -298 -307
Financing
953 1,274 1,306 969
Cash Flow

Question 1C:
Analyze the expected cash flow profile of the company for the year 2006(E) and
comment on any 3 of the following factors: 'self-financing of investments', 'funding of
investments', 'cash position of the company' and 'free cash flow'

Answer 1C:
 The Cash Flow Profile of the company for the year of 2006(E) is NEGATIVE it
means the company is not having sufficient cash balance to run the operational
activities
 Self-financing of investment: The Cash flow from the business are high and can
be funded for its growth. The standards for operational activities are set higher
than other activities.
 Cash Flow from Operating Profit or CFO ($226,000) > CFI (-1398) + CFF (969)
Therefore, it can finance its own investment.
 Funding of Investment: As shown in the graph, the Funding of Investment is
provided by both operating cash flows and financing activities cash flows.
 Company Cash Position: The company cash position is NEGATIVE and is
calculated by adding CFO + CFI + CFF = NEGATIVE
 Free Cash Flow: there is no free cash flow within the company as it is negative
position,
CFO – CFI = Negative free cash flow

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Question 2

Question 2A:
Calculate the operating working capital of Ceres Gardening Company for 2002– 2006(E)

Answer 2A:

Operating Working Capital = Account Receivables + Inventory – Accounts Payable

Year 2002 2003 2004 2005 2006(E)
Account
3,485 4,405 6,821 10,286 14,471
Receivable
Inventory 3,089 2,795 3,201 3,291 3,847
Accounts
2,034 2,973 4,899 6,660 9,424
Payable
Operating
Working
Capital 4,540 4,227 5,123 6,917 8,894
(OWC)

Question 2B:
Calculate the operating working capital/sales ratio of Ceres Gardening Company for 2002 to 2006(E)

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Answer 2B:
Operating Working Capital / Sales Ratio = Operating Working Capital / Sales
Year 2002 2003 2004 2005 2006(E)
Operating
Working 4,540 4,227 5,123 6,917 8,894
Capital
Sales 24,652 26,797 29,289 35,088 42,597
Operating
Working
5 6 6 5 5
Capital
Ratio

Question 2C:
Calculate the DIO, DSO and DPO for the company from 2002 to 2006(E)

Answer 2C:
DIO : Inventory / Cost of Goods Sold perday
Year 2002 2003 2004 2005 2006(E)
Inventory 3,089 2,795 3,201 3,291 3,847
COGS /
57 60 66 79 97
360
DIO 54 47 48 42 40

DSO : Account Receivable / Sales Revenue Perday

Year 2002 2003 2004 2005 2006(E)
Account
3,485 4,405 6,821 10,286 14,471
Receivable
Sales
Revenue / 68 74 81 97 118
360
DSO 51 60 84 106 123

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DPO : Accounts Payables / COGS Perday
Year 2002 2003 2004 2005 2006(E)
Account
2,034 2,973 4,899 6,660 9,424
Payables
COGS /
57 60 66 79 97
360
DPO 36 50 74 84 97

Question 2D:
What is the implication of the long credit period given to dealers by Ceres Gardening
Limited on its working capital? Explain your answer by specifying at least one reason.

Answer 2D:

The impact of long-term credit on dealers will have a negative impact on working capital
because there will be a negative change in cash, and this absolutely will not be profitable
for the company.

On the Ceres Gardening’s Case Study, it’s stated that dealers often asked for extensions
of their payment terms. So the Operating Working Capital (OWC), will be carried on to
the next period.

So, on the company’s balance sheet the OWC will increase because Ceres made new
sales but on DSO will show as increasing trend because it is a delayed payment of
customers with poor credit, on the other hand, DIO is decreasing because showing the
sales have been made and the company is selling inventory more rapidly in the past.

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Question 3

Question 3:
Prepare and present the economic balance sheet for Ceres Gardening Company and
calculate the capital employed by the company.

Answer 3:
Capital employed = Total assets - current liabilities
 Year of 2002 = 10,631-2,349 = 8,282

 Year of 2003 = 13,817-3,325 =10,492

 Year of 2004 = 18,295-5,423 = 12,872

 Year of 2005 = 22,850-7,390 = 15,460

 Year of 2006 = 28,117-10,074 =18,043

CERES GARDENING COMPANY

ECONOMIC BALANCE SHEET
AT DECEMBER 31st

2002 2003 2004 2005 2006

Core Business Operations (CBO)
Cash 705 1,542 1,818 2,158 1,955
Account Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Plant, Property & Equipment (NET) 2,257 2,680 2,958 3,617 4,347
Land 450 1,750 2,853 2,853 2,853
Total CBO 9,986 13,172 17,650 22,205 27,472
Non-operating Assets
Other Assets 645 645 645 645 645

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 Debt and Debt Equivalent
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Current Portion of Long-term Debt 315 352 525 730 649
Long-term Debt 3,258 4,400 5,726 7,123 8,480
Total Debts 5,607 7,726 11,149 14,514 18,554
Others Capital Claims
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
Inclusion of all Economic Assets, 10,631 13,817 18,295 22,850 28,117
Debts and Capital Claims

Question 4

Question 4A:
Calculate the key profitability ratios for the years 2002 to 2006(E). (8 marks, 2 for each key ratio)

Answer 4A:

Formula Year 2002 2003 2004 2005 2006(E)

(Sales Revenue
Variable
– COGS) / Sales 17% 19% 18,6% 18,5% 17,6%
x 100
Margin
(Operating
Income / Sales Operating
8,07% 10,26% 9,78% 9,67% 8,6%
Revenue) x Margin
100
(Net Profit /
Return on
Owners 23,71% 21,23% 17,91% 17,8% 16%
Equity
Equity) x 100
Earnings after
taxes before
interest/ Return on
(opening Average
19,83% 24,05% 19,88% 19,16% 18%
capital Capital
employed + Employed
closing capital
employed)/2)

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Formula
EBIT + D.A
Equity + Long
Term Debt +
Current Portion
of Long Term
Debt
(Year 1 equity
+ year 2
equity) / 2
2002 2003 2004 2005 2006(E)
EBITDA 1989 2750 2864 3392 3687
Capital 8597 10843 13397 16189 18692
Employed

Average 8282 9386 11681 14165 16751

Capital
Employed

Question 4B:
What is the trend in RoE from 2002 to 2006(E)? List down at least one reason for the
increase/decrease in RoE by assessing the drivers of RoE.

Answer 4B:

Based on the data, the company's ROE declined between 2002 and 2006 (E).

The main reason for the declining trend is because the uneven increase in capital
compared to the increase in the company's net income.

After the denominator, equity increased further over the same period compared to the
company's net income, which leads to a decline in the overall ratio.

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In addition, the increase in capital appears to be due to changes in working capital and
may be vigilant if not properly managed.

The decline in ROE is not good for the company. To leverage the funds that the company
borrows from banks instead, the company should reduce shareholders' equity, and
achieve optimal leverage with maintain a balance between banks and shareholders.

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 Question 4C:

What is the trend in RoACE from 2002 to 2006(E)? List down at least one reason for the
increase/decrease in RoACE by assessing the drivers of RoACE.

Answer 4C:

The company's ROACE does not show a linear trend, but it has changed over time. The 2003 peak was prima
caused EBIT levels.

Question 5

Question 5:
List down at least two pros and two cons of the GetCeres program for Ceres
Gardening Company. Would you recommend continuing with the program? Justify
your answer.

Answer 5:

Pros of the GetCeres Program :

 Based on income statement the GetCeres program increased the sales from 35,1
million dollars in 2005 to 42,6 million dollars in 2006 which, the retail channel
amount for over 80% of GetCeres’s total revenue.
 With the GetCeres Program, the company exceeded the Break Even Point of
approximately 30 million dollars of revenue.

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Cons of the GetCeres Program :

 The terms of payment got delayed because of the dealers often asked for
extensions. Sometimes even the dealers did not pay until they sold the products.
 Inadequate distribution system, and by giving the dealers 120 days payment
terms, Ceres have to raise the price of their product therefore the dealers are not
willing accommodate a large supply of their product.

Recommendations :

 The GetCeres Program is good only for the short term, it will increase sales of
their product and market exposure. Eventually, this program will increase the long
– term debt of the company and by self - financing the program, the company will
have to pay higher interest hence it will affect the profit margin and could lead to
bankruptcy. This program is beneficial in the short term but I will not recommend
this program for the long term. I recommend Ceres to switch to a more
conservative, slow growth program. Ceres would be able to avoid bankruptcy
while increasing their profit margin even though they would lose some market
share. However, Ceres could try new marketing strategies, to focus on increasing
sales, market share, reducing the cost for advertising while increasing its
effectiveness, and maintaining a credit line to cover seasonal sales. Another
recommendation is that Ceres could merge with a retail company to relinquish
their initial distribution problem however it could cost them some control of their
company.

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