COURSE: ACCOUNTING AND FINANCE

PROJECT: Analysis of Ceres Gardening Company

Instructions for the submission:
• Please maintain the following: Font - Times New Roman, Font Size - 12, Line Spacing -
1.5

Name Akshay Roy

NOTE: Values are in $ thousand, some values are rounded.

Question 1

Ans 1A-

The profits estimated for the year 2006 which translated from the cash flow of operations
is $226

We can see a decline in the cash generated from operating activities since 2003.
Therefore, out of the three categories in the cash flow statement, cash flow from
operating activities has contributed majorly to the decrease in the 'change in cash' by the
company from 2003 to 2006(E)

Ans 1B-

Trends in cash flow statements in all 3 activities are explained below

Operating Activities: The operating activities are in decreasing trend as in the year 2003
the cash flow was $2,019 which decreased to $838 in 2004, $250 in 2005 and $226 in
2006(E)

Investing Activities: The investing activities are in fluctuating trend as we can see in
2003 the cash flow was -$2,135 and then it increased for the next two consecutive years
of 2004 and 2005 with the cash flow of -$1,836 and -$1,215 respectively but in the year
2006(E) we noticed that the cash flow decreased to -$1,398

Financing Activities: The financing activities are also in fluctuating trend as the cash
flow in 2003 was $953 which was in increasing trend till the year 2005 with the cash
flow of $1,274 in 2004 and $1,306 in 2005 but in the year 2006(E) we noticed a decrease
in the cash flow in comparison to last year which amounted to $969

 Reason for the increase/decrease in each of the three categories of the cash flow
statement.

Operating Activities : The reason that the cash flow is in decreasing trend in the
operating activities is because of the ‘Change in Account Receivable’. The company has
increased their credit sales over the years from 2003 to 2006(E) and it is yet to be paid by
the customer which is the reason why operating cash flow is in decreasing trend.

Investing Activities : The reason that the cash flow is in fluctuating trend in the investing
activities is because of the increase in ‘investment of PP&E’(Property, Plant and
Equipments)

Financing Activities : The reason that the cash flow is in fluctuating trend in the
financing activities is because of more loans taken by the company and the increase in
retirement of debt. The company has paid off its debt since the year 2003 ($315) and it
can be seen that retirement of debt is in increasing trend till the year 2006 ($730) which
means increased cash outflow and it results in less cash generated from financing
activities. Therefore, we can see a fluctuating trend in the financing activities as at first it
increased till 2005 and then it started decreasing in the year 2006.

Ans 1C-

Cash flow profile of the company for the year 2006(E) on the basis of 3 factors – Self
financing, Cash Position and Free Cash Flow are mentioned below:

 Self Financing : CFO>CFI

In 2006 CFO is $226 and CFI is -$1,398

As we can see that the Cash flow from operations is less than Cash flow from investing,
we can say that the company is financing its assets and investments not only from cash
generated from operations but also from other sources like loans or equity. Hence, the
company is not self financing.

 Cash Position = CFO+CFI+CFF

226+(-1398)+969 = -$203

The cash position is coming out to be negative which means that the company has
generated less cash than it has invested in the year 2006.

 Free Cash Flow: The free cash flow is estimated by CFO-CFI. In our case it will
be $226 - $1,398 = -$1,172

Free cash flow is coming as negative which means the company does not have free cash
flow.

Question 2

Ans 2A-

The operating working capital of Ceres Gardening Company for 2002–2006(E) is

calculated below:

Operating Working Capital = Accounts receivables + Inventory - Accounts payables

 Year 2002 2003 2004 2005 2006
Account receivable 3,485 4,405 6,821 10,286 14,471
Inventory 3,089 2,795 3,201 3,291 3,847
Accounts payables 2,034 2,973 4,899 6,660 9,424
 
OWC 4540 4227 5122 6917 8894

Ans 2B-

The operating working capital/sales ratio of Ceres Gardening Company for 2002 to

2006(E) is calculated below:

Operating Working Capital Ratio = Operating working capital/ Sales

Year 2002 2003 2004 2005 2006

Account receivable 3,485 4,405 6,821 10,286 14,471
Inventory 3,089 2,795 3,201 3,291 3,847
Accounts payables 2,034 2,973 4,899 6,660 9,424

OWC 4540 4227 5122 6917 8894

 
Sales revenue 24,652 26,797 29,289 35,088 42,597
 
OWC/Sales Ratio 18.41% 15.77% 17.48% 19.71% 20.87%

Ans 2C-

Note: Here it is assumed that there are 360 operational days in the year.

The DIO, DSO and DPO for the company from 2002 to 2006(E) is calculated below:

Sales revenue per day = Sales revenue/360

COGS per day = COGS/360

DIO = Inventory / Cost of goods sold per day

DSO = Accounts receivables / Sales revenue per day

DPO = Accounts payables / Cost of goods sold per day

DIO = Inventory/COGS *
360 days
Year 2002 2003 2004 2005 2006
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 54.35 46.36 48.33 41.42 39.45

DSO = Account
receivable/Sales *360
Year 2002 2003 2004 2005 2006
Account receivable 3,485 4,405 6,821 10,286 14,471
Sales revenue 24,652 26,797 29,289 35,088 42,597
DSO 50.89 59.18 83.84 105.53 122.3

DPO= Account Payble

/COGS*360
Year 2002 2003 2004 2005 2006
Accounts payables 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 35.79 49.32 73.97 83.84 96.66

Ans 2D-

When Ceres gardening company launched the GetCeres Program they started providing
120 days payment terms to the both the existing and new dealers. The implication of the
long credit period given to dealers was to increase the sales and to accelerate the growth
in the retail channel.

Due to the long credit period given to dealers by Ceres Gardening Limited it affected the
accounts receivables of the company. Since the company started giving extended credit
period to dealers the company started seeing a decrease in the cash generated from
operating activities, and to compensate the decrease in the working capital the company
would require additional funds.

Question 3

Ans 3-

The economical balance sheet for the year 2002 – 2006(E) is prepared and mentioned
below. (Note- Values are in $ thousand. and some of the values are rounded)

Years 2002 2003 2004 2005 2006E

Assets
Accounts Payable -2,034 -2,973 -4,899 -6,660 -9,424
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventory 3,089 2,795 3,201 3,291 3,847
PP&E (Net) 2,257 2,680 2,958 3,617 4,347
Other Assets 645 645 645 645 645
Land 450 1,750 2,853 2,853 2,853
Capital Employed 7,892 9,301 11,578 14,032 16,738
Liabilities & Shareholders’
Equity
Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Current Portion of Long-term
315 352 525 730 649
Debt
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
Cash -705 -1,542 -1,818 -2,158 -1,955
Invested Capital 7,892 9,301 11,578 14,032 16,738
Question 4

Ans 4A-

The key profitability ratios for the years 2002 to 2006(E) are calculated below:

 Variable Margin = (Sales revenue - cost of goods sold) / Sales

Year 2002 2003 2004 2005 2006E

Sales 24652 26797 29289 35088 42597
Cost of goods sold 20461 21706 23841 28597 35100
Variable Margin (%) 17.00 19.00 18.60 18.50 17.60

 Operating Margin = Operating income / Sales

Year 2002 2003 2004 2005 2006E

Operating Income 1641 2338 2408 2836 3018
Sales 24652 26797 29289 35088 42597
Operating Margin 6.65% 8.72% 8.22% 8.08% 7.08%

 Return on Equity = Net profit / Owners' equity

Year 2002 2003 2004 2005 2006E

Net Income 1191 1293 1279 1488 1534
Equity 5024 6091 7146 8336 9563
ROE 23.70% 21.22% 17.89% 17.85% 16.04%

 Return on Average Capital Employed = Earnings after taxes before interest /

{(Opening capital employed + Closing capital employed)/2}

Year 2002 2003 2004 2005 2006E

EBIT - Tax 1377 1642 1719 2035 2192
Average Capital
Employed 7892 8597 10440 12805 15385
RoACE 17.44% 19.09% 16.46% 15.89% 14.24%

Ans 4B-
The RoE from 2002 to 2006(E) is in decreasing trend as we can interpret from the table that
the RoE for 2002 was 23.70% which decreased to 16.04% in 2006(E).

The reason why the RoE is in decreasing trend is because of the ‘Interest’ Driver of RoE. We
can calculate this by calculating EBT/EBIT which follows the same trend as RoE.

Ans 4C-

The RoACE from 2002 to 2006(E) was in increasing trend at first from 2002 to 2003 with
the percentage of 17.44% and 19.09% respectively but in 2004 the RoACE declined to
16.46% and it started a decreasing trend till the year 2006(E) with the RoACE of 14.24%

The reason why the RoACE is in decreasing trend is because of the ‘Operating Margin’
Driver of RoACE. We can calculate this by calculating Operating Income/Sales which
follows the same trend as RoACE.

Question 5

Two Pros and Cons of the GetCeres program for Ceres Gardening Company are listed
below:

Pros of GetCeres Program to the company

Increase the Sales: The GetCeres program offered multiple facilities and advantages to
the dealers such as discounted rates of products and extended payment terms. New
dealers were attracted to these offers and hence it increased the sale of the products.

Growth in the Retail Market: GetCeres Program was launched in 2005 with the
objective to grow in the retail channel. The program was designed with multiple
strategies and offered many discounts to reach out to existing dealers as well as new
dealers. The new strategies and tactics used under the GetCeres program enabled the
company to grow in the retail market

Cons of GetCeres Program to the company

Decrease in cash inflow: The cash flow of the company was affected drastically in the
year 2005 and 2006. The GetCeres program was launched with new payment terms
where they offered 120 days payment terms for all the products purchased under the
program, due to this the accounts receivable in 2005 and 2006 were increased and hence
the cash flow was decreased

Increase in Debt: Under the GetCeres program, the dealers were given the privilege to
pay 120 days from the delivery date which resulted in a decrease in the inflow of cash, to
cover the cost of the company the Long term debts of Ceres gardening company were
gradually increasing.

Yes, I would recommend continuing with the program as we can see in the income
statement that there is an increasing trend in the profits of the company which will be
beneficial for the company in the long run as it can cover its COGS and the repayment of
debts.