Name Jyoti Nishad

Question 1

The profits estimated for the year 2006(E) will translate to the ‘cash flow from
operations’ is 226.

The categories that had contributed majorly to the decrease in the ‘change in cash’ are
Accounts Receivable, Investment in PP&E and Debt Issuance.

The trend in cashflow from operating activity is decreasing mainly because of increase in
account receivables and that occur precisely because of increase in credit period of
dealers. The motive was to propel the nurseries and garden centers to be fully stocked for
peak season demands. Thus, this led to increase in DSO.

On the other hand, cashflow from investing activity is decreasing except in the year
2006E, it has shown a bit increase. Since the company was more employed in purchasing
asset in the form of PP&E investment, it eventually affected the overall investing
cashflow. Investment in land for the two consecutive years also played a significant role
in the decrease of investing activity. However in the year 2005 and 2006E, the company
didn’t invest in land, which somewhat decrease the level of cash outflow in investing
activity.

The trend in financing activity is constant. It has increased a bit in the year 2004 and
2005 but came back to its initial number in the year 2006E. This has happened firstly
because the company is issuing debt and at the same time paying its older debt whose
retirement has come and paying dividends to its shareholders. Thus, making the outflow
and inflow parallel to each other.
 1- Funding of Investments – The cashflow from investing activity is going into minus
which means company is purchasing or investing into assets. A small portion of
investment has been done by using operating cashflow and the major part is being
done by using cashflow from financing activities.
2- Self-Financing of Investment – The company is financing its investments majorly
from raising equity from shareholders and taking long term debts. Thus, self-
financing its investment activities as it was unable to generate enough cash from
operating activities.
3- Free Cash Flow – As the company generated very low cash outflow from
operating activity and it was lesser than the investments made by the company, it
was unable to generate free cash flow. Hence, ended up using the whole
operating cash outflow in investing activity.

Question 2

Operating working capital for the years 2002 -2006E.

2002 – 4540

2003 – 4227

2004 – 5123

2005 – 6917

2006E – 8894

Operating Working Capital Ratio for the years 2002 – 2006E.

2002 – 18.41%
2003 – 15.77%

2004 – 17.49%

2005 – 19.71%

2006E – 20.87%

Days Inventory Outstanding (DIO) for the years 2002-2006E.

Inventory / COGS per day

2002 – DIO is 54 days.

2003 – DIO is 46 days.

2004 – DIO is 48 days.

2005 – DIO is 41 days.

2006 – DIO is 39 days.

Days Sales Outstanding (DSO) for the years 2002-2006E.

Account Receivable / Sales Revenue Per Day

2002 – DSO is 51 days

2003 – DSO is 59 days

2004 – DSO is 84 days

2005 – DSO is 106 days

2006E – DSO is 122 days

 Days Payable Outstanding (DPO) for the years 2002-2006E

2002 – DPO is 36 days

2003 – DPO is 49 days

2004 – DPO is 74 days

2005 – DPO is 84 days

2006 – DPO is 97 days

Giving long credit period to its dealer, Ceres was able to increase its account receivable
which is much higher than industry standard. As operating working capital = Inventory
+ Receivable – Payable. This summed up for Ceres Gardening Company by how
increasing the credit period they were able to generate higher operating working capital
and thus, increased its sales and profit.

Question 3

Economic balance sheet.

Capital Employed 2002 2003 2004 2005 2006E Capital Invested 2002 2003 2004 2005 2006E
Plant, Property & Equipment 2257 2680 2958 3617 4347 Shareholders Equity 5024 6091 7146 8336 9563
Other Asset 645 645 645 645 645 Current Portion of Long-Term Debt 315 352 525 730 649
Land 450 1750 2853 2853 2853 Long-Term Debt 3258 4400 5726 7123 8480
Non-Current Assets 3352 5075 6456 7115 7844 Cash -705 -1542 -1818 -2158 -1955
Account Receivable 3485 4405 6821 10286 14471
Inventory 3089 2795 3201 3291 3847
Accound Payable -2034 -2973 -4899 -6660 -9424
Operating Working Capital 4540 4227 5123 6917 8894
Capital Employed 7892 9301 11579 14032 16738 Capital Invested 7892 9301 11579 14032 16738

Capital Employed (from financial statement) = Total Asset – Current Liability

Capital employed for the year 2002-2006E.

2002 – 8282
 2003 – 10492

2004 – 12872

2005 – 15460

2006E - 18043

Question 4

2002 2003 2004 2005 2006E

Sales 24652 26797 29289 35088 42597
COGS 20461 21706 23841 28597 35100
Variable Margin = Total Sales - COGS / Sales. 17% 18.99% 18.60% 18.49% 17.59%

2002 2003 2004 2005 2006E

Earning before Interest & Tax 1641 2338 2408 2836 3018
Operating Margin = EBIT / Sales 6.65% 8.72% 8.22% 8.08% 7.08%

2002 2003 2004 2005 2006E

Net Profit 1191 1293 1279 1488 1534
Owner's Equity 5024 6091 7146 8336 9563
Return on Equity = Net Profit / Owner's Equity 23.70% 21.22% 17.89% 17.85% 16.04%

2002 2003 2004 2005 2006E

Adjusted net operating income = EBIT*(1-(Tax/EBT)) 1343.80 1519.57 1565.04 1843.13 1961.85
Average Capital Employed = CE at the beginning of
the year + CE at the end of the year / 2 8282.00 9386.57 11681.4 14165.6 16751.46
ROACE = Adjusted net operating income / Average CE 16.23% 16.19% 13.40% 13.01% 11.71%

Trend – The ROE is declining,

ROE is declining mainly because return on capital is also decrasing in the years 2002-
2006E. ROCE is one of the drivers of ROE.

ROCE = EBIT/CE.
 Trend – ROACE is declining

It is declining because of reduction in efficiency.

One of the drivers of ROACE is capital employed turnover ratio. It has been declined
from 2.98 in 2002 to 2.35 in 2006E.

Question 5

Pros

1- Get ceres helped in reducing DIO. Which means company is utilizing its inventory
at its best and there’s no chance of it to get wasted.
2- Get ceres helped in increase the sales of the Ceres Gardening company from
24652 in 2002 to 42597 in 2006E. Almost twice of the initial sales.

Cons

1- With the Get Ceres program, The company increased its credit period almost
from 90 to 120 days that means the company is highly dependable upon trade
credit. This eventually resulted in less cash outflow from operating acitivities.
2- Get Ceres program also led to decline in ROACE. Which shows that the company
is not efficiently utilizing the funds deployed. And because of that capital
employed turnover and operating margin are also declining.

Recommendation:

Get Ceres Program should be discontinued.

This program led company to depend highly upon long term debts and shareholder funds
as it is not able to generate enough cash from operating activity. Further the account
receivable has been increased drastically, which means in future, the company has to
depend more upon funds from outside. The prevalence of change in cash of the year
2006E is in minus, which means the liability of the company has been increased in
greater number and in future there are chances of it’s to get bankrupt. Additionally the
way this program has been implemented, has led to decrease in ROACE, that means
company is not efficiently utilizing its capital to generate profits.