Name Debasish Pattanaik

Question 1

Ans 1A(a): For the year 2006(E) an amount of 226 will translate to cash flow from
operations.

Ans 1A(b): Cash flow from the investing activity has majorly contributed for decrease in
cash.

Cash Flow Profile from Investing Activity

Cash Generated

0
2003 2004 2005 2006
-2,000 -1,215 -1,398
-2,135 -1,836
-4,000
Year

Ans 1B
Years 2003 2004 2005 2006E
Operating Cash Flow 2,019 838 250 226
Investing Cash Flow -2,135 -1,836 -1,215 -1,398
Financing Cash Flow 953 1,274 1,306 969

In case of Ceres Gardening company,

The CFO is in decreasing trend. The reason behind this is drastically increase of
account receivables.
The CFI has a mixed trend. From year 2003 to 2005 it is decreasing trend and
2005 to 2006 it is in increasing trend. The reason behind this is change in
investment category.
The CFF has a mixed trend. From year 2003 to 2005 it is increasing trend and
2005 to 2006 it is in decreasing trend. The reason behind this is change in
issuance and retirement of debt.
Ans 1C:

Cash Flow Profile

Self-Financing - When cash flow from Operation is generating enough cash to carry out
investing and financing activity and still some cash left out, then company is self-
financing. (CFO> CFI+CFF and still +ve)
In case of Ceres Gardening, it is -ve, thus company is not self-financing.
Cash Position - CFO+CFF+CFI is +ve, then the company has generated cash and cash
position in current year is positive. CFO+CFF+CFI is -ve, then the company had spent
more money than it has generated, then the company cash position for current year is -ve.
In case of Ceres Gardening company, the cash position for the year 2006 is -ve.
Free Cash Flow – CFO-CFI is +ve, then this free cash is for the stake holders. In case of
Ceres Gardening company for the year 2006, the cash flow is -ve, so there is no free cash
flow.

Question 2

Ans 2A:
Operating Working Capital (OWC) = Inventory + Accounts Receivables - Accounts
Payable

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
OWC 4,540 4,227 5,122 6,917 8,894
Ans 2B:

Operating Working Capital (OWC) = Inventory + Accounts Receivables-Accounts

Payable
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
OWC 4,540 4,227 5,122 6,917 8,894

Operating Working Capital ratio = Operating Working Capital / Sales*100

2002 2003 2004 2005 2006E
OWC 4,540 4,227 5,122 6,917 8,894
Sales 24,652 26,797 29,289 35,088 42,597
18.42 15.77 17.49 19.71 20.88

Ans 2C:
Days Inventory Outstanding (DIO) = Inventory/Cost of Goods Sold*360
2002 2003 2004 2005 2006E
Inventories 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

Days Sales Outstanding (DSO)=Accounts Receivables/Sales Revenue*360

2002 2003 2004 2005 2006E
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DSO 61 73 103 129 148

Days Payables Outstanding (DPO)=Accounts Payables/Sales Revenue*360

2002 2003 2004 2005 2006E
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DPO 36 49 74 84 97

Ans 2D:
As per the analysis of data’s, the required amount of Operating Working Capital (OWC)
is increased. The main reason behind this change is in drastically increase in DSO
Question 3

Ans 3:
Economical Balance Sheet
At December 31 2002 2003 2004 2005 2006E
Assets
Cash 705 1,542 1,818 2,158 1,955
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Current Assets 7,279 8,742 11,839 15,735 20,273
Plant, Property, &
2,257 2,680 2,958 3,617 4,347
Equipment (net)
Other Assets 645 645 645 645 645
Land 450 1,750 2,853 2,853 2,853
Non-Current Assets 3,352 5,075 6,456 7,115 7,844
Total Assets 10,631 13,817 18,295 22,850 28,117
Cash (-) 705 1,542 1,818 2,158 1,955
Accounts Payable (-) 2,034 2,973 4,899 6,660 9,424
Capital Employed 7,892 9,301 11,578 14,032 16,738

Liabilities &
Shareholders’ Equity
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Current Portion of Long-
315 352 525 730 649
term Debt
Current Liabilities 2,349 3,325 5,423 7,390 10,074
Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
Total Liabilities &
10,631 13,817 18,295 22,850 28,117
Shareholders’ Equity
Cash (-) 705 1,542 1,818 2,158 1,955
Accounts Payable (-) 2,034 2,973 4,899 6,660 9,424
Capital Invested 7892 9301 11578 14032 16738

Capital Employed by Company

2002 2003 2004 2005 2006E

7892 9301 11578 14032 16738
Question 4

Ans 4A:
Variable Margin = (Sales Revenue - Cost of goods sold)/Sales X100
2002 2003 2004 2005 2006E
Variable Margin 17 19 18.6 18.5 17.6

Operating Income = Operating Income (EBIT)/Sales X100

2002 2003 2004 2005 2006E
Operating Income 6.66 8.72 8.22 8.08 7.09

Return on Equity = Net profit /Owner's equity X100

2002 2003 2004 2005 2006E
Net Profit 1,191 1,293 1,279 1,488 1,534
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
RoE 23.70 21.23 17.90 17.85 16.04

EBIAT = Earnings before interest after tax

2002 2003 2004 2005 2006E
EBIAT 1,378 1,642 1,719 2,034 2,192
Average Capital Employed 7892 8597 10440 12805 15385
RoACE 17.46 19.10 16.47 15.89 14.25

Ans 4B:
The RoE from 2002 to 2006 is in decreasing trend. High interest is the key driver for this
effect.
2002 2003 2004 2005 2006E
RoE 24 21 18 18 16
Financial Leverage=Capital
1.57 1.53 1.62 1.68 1.75
Employed/Equity
Interest = EBT/EBIT 0.89 0.85 0.82 0.81 0.78
Tax = EAT/EBT 0.82 0.65 0.65 0.65 0.65

Ans 4C:
The RoACE from 2002 to 2006 is in decreasing trend. Efficiency is the key driver for this
effect.
2002 2003 2004 2005 2006E
RoACE 17.46 19.10 16.47 15.89 14.25
Operating Margin = EBIT/Sales 6.66 8.72 8.22 8.08 7.09
Efficiency=Sales/Capital Employed 3.12 2.88 2.53 2.50 2.54
Question 5

Ans 5:

Pros

1. The GetCeres program is a success for the company and it is reflected the Balance
sheet.
2. Gross profit has increased and it is reflected on the income statement.

Cons

1. Though the company has generated cash but in the end cash flow is negative due
to investing heavily.
2. Debt is increasing considerably.

My Recommendation

Due to the effect of GetCeres program company is adding more customers and
growing & revenue is increasing. To sustain this growth company’s working capital
requirement is increasing and Ceres Gardening Company is taking lots of debts to
support this program. To maintain the growth and beat the competition company has
increased the extended additional line of credit period to the dealers beyond the industry
norms. Many pointers are not that favorable, still I recommend to continue the GetCeres
program for few more year to be in the market leader position in this category of
business.