Name Dr Syed Shah Moinuddin hussaini

Question 1 A

For the year 2006 profit estimates is 226K$ which would translate to cash flow from operations for that
year.

Decrease in change in cash is due to investing in cash flow by the company from 2003 to 2006

Year 2003 2004 2005 2006

Account receivable in $ in thousands -920 -2416 -3465 -4185

Trend in cash flow from the operating activity is decreasing from 2003 to 2006 due to increase in
accounts receivable

Investing activity is decreasing from 2003 to 2006 due to increase in investment in plant equipment and
property and also in Land

Year 2003 2004 2005 2006

Investment in plant property and equipment -835 -734 -1215 -1398

Investment in Land -1300 -1103

Trend in Financing activities is constant because returning of debts and dividends are almost similar based
on the table below.

Year 2003 2004 2005 2006

Debt issuance 1494 1850 2128 2006

Retirement of debts -315 -352 -525 -730

Dividends -226 -224 -228 -307

Financing cash flow 953 10274 1306 969

Answer B
 2003 2004 2005 2006 Trend with respect to cash flow

CFO 2019 838 250 226 Decreased

CFI -2135 -1836 -1215 -1398 Increased

CFF 953 1274 1306 969 Increased from 2003 to 2004 and decreased
from 2004 to 2006

The reason for

1) Decresed trend of CFO is due to increase in account receivable due to less cash release from sales
2) Increased trend of CFI is due to investment in PP & E showing a sizeable investment in
company’s future
3) Decresed trend of CFF from 2004 to 2006 is due to increased trend of payment of retirement of
debts and dividends

Answer C

The cash flow profile of the company for the year 2006 is negative

A) Self financing of investment (Cash flow from operation is more than cash flow from investments)
1) CFO(226K$) is more than CFI (-1398$) +CFF (969$)
Since CFO is more than CFI+CFF means cash flow from the operations are high and it is able
to finance its growth the bar of operating activities is higher than other activities.

II) Funding of investments :

CFO 226$ CFF 969 $

As shown in the graph the funding of investment is done by cash flow from operations and cash flow
from financing activities.

III) Cash position of the company

CFI+ CFO+CFF = 226$+(-1398$)+969$=-203$.

The negative sign in cash position indicates that the company has spent more money than that generated
in the year.

IV)Free cash Flow

CFO-CFI. There is no free cash flow as CFO-CFI is negative.

Question 2
 2A :Operating working capital + Account recievables +Inventory –Account payable

Year 2002 2003 2004 2005 2006E

Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Operating working capital 4,540 4,227 5,122 6,917 8,894

2B

year 2002 2003 2004 2005 2006

Operating working
capital 4540 4227 5122 6917 8894
Sales 24652 26797 29189 35088 42597
5.42995 6.33948 5.07271 4.78940
Ratio 6 4 5.69875 9 9

2 C DIO=Inventory/Cost of good soldX365

year 2002 2003 2004 2005 2006E

Inventory 3,089 2,795 3,201 3,291 3,847
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DIO 54 46 48 41 39

DSO=Accounts recievable /salesX no of days.

Year 2002 2003 2004 2005 2006E

Accounts Receivable 3,485 4,405 6,821 10,286 14,471

Sales 24,652 26,797 29,289 35,088 42,597
DSO 51.59926 60.00019 85.00341 106.9993 123.9973

DPO=Accounts payable X no of days/cost of good sold

At December 31 2002 2003 2004 2005 2006E

Accounts Payable 2,034 2,973 4,899 6,660 9,424
No of days 365 365 365 365 365
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DPO 36.284 50.00 75.00 85.00 98.00

From the year 2003 to 2006 it is seen that operating working capital has gone down due to decreasing inventories. This
indicates that the company is not converting its inventory into cash. Due to this the company will end up having increased
storag and maintainance costs.

Question 3
 2002
Financing Operating
Capital invetsed Amount Capital employed Amount
Equity 5024 Fixed assest 3352
Debt 3573 OWC 4540
Less cash 705
Total CI 7892 Total CE 7892
2003
Equity 6091 Fixed assest 5075
Debt 4752 OWC 4227
Less cash 1542
Total CI 9301 Total CE 9302
2004
Equity 7146 Fixed assest 6456
Debt 6251 OWC 5122
Less cash 1818
Total CI 11579 Total CE 11578
2005
Equity 8336 Fixed assest 7115
Debt 7854 OWC 6917
Less cash 2158
Total CI 14032 Total CE 14032
2006
Equity 9563 Fixed assest 7844
Debt 9129 OWC 8894
Less cash 1955
Total CI 16737 Total CE 16738

Question 4

4A

Key Profitability
ratio 2002 2003 2004 2005 2006
(/Sales X100Sales revenue-
Variable margin COGS) 6% 5% 5% 5.40% 5.60%
Operating margin Operating Income/sales 15% 11% 12% 12% 14%
Return on equity PAT/Equity 0.24 0.21 0.18 0.18 0.16
EBIT/Opening capital
employed+Closing capital
Return on ACE employed/2 9.70% 10.40% 13.24% 13.84% 20.40%

4B

ROE trend is decreasing.

 As there is increase in equity of shareholders from 2003 to 2006, the companys ROE has decreased . decrease in
performance of the operations of the company has led to decrease in ROE.

RoACE Trend is decreasing

Efficiency and operating margin are driver of RoACE. Since The operating margin is decreasing , it is the reason
behind decreasing of ROACE In 2003 operating margin was 8.72 % .while in 2006 it reduced to 7.09%.

The decreasing trend is due to decrease in efficiency.

Question 5

Pros:

1) Sales increased from 35.1 Million $ in 2005to 42.6 million $ in 2006.

2) The company did well with financial viablity with the break even point approximately 30 million $
revenues under the current cost structure.
3) 3Decrease in DIO

Cons:

1) Payment was delayed by dealers even after giving the payment terms. This affected the buisnees
drastically.
2) Decraese in ROE
3) Incraese in DSO

Going Ahead with Ceres company may not be recommended due to the following Reasons

1 Very high COGS

2) Decrease in ROE suggest equity holders are not getting desired returns.
3) increase in DSO means Account Receivable in 2006 of 14,471 represent 122 days of sales revenue
outstanding.