Name

Question 1

For the year 2006 (E), estimated $226 thousand profits would translate to “cash flow
from operations” for the same year.

Investing cash flow has contributed majorly to the decrease in “change in cash” by the
company from the year 2003-2006 (E)

1. Trend in cash flow from the “Operating Activities” is decreasing from 2003 to 2006
(E).
Reason: Due to the Increase in Accounts Receivables.

Years Ending December 31 2003 2004 2005 2006E

Change in Accounts Receivable In
-920 -2,416 -3,465 -4,185
$ thousand

2. Trend in cash flow from “Investing Activities” is Decreasing from 2003 to 2006 (E).
Reason: Due to investment in Property, Plant and Equipment.

Years Ending December 31 2003 2004 2005 2006E

Investment in Property, Plant &
-835 -734 -1,215 -1,398
Equipment
Investment in Land -1,300 -1,103 0 0

3. Trend in cash flow from “Financing Activities” is constant.

Reason: As Retirement of Debt and Dividends are almost similar

Years Ending December 31 2003 2004 2005 2006E

Debt Issuance 1,494 1,850 2,128 2,006
Retirement of Debt -315 -352 -525 -730
Dividends -226 -224 -298 -307
Financing Cash Flow 953 1,274 1,306 969
1C: The cash flow profile of the company for the year 2006 (E) is Negative.

 Self-Financing of Investments: The cash flow from the operations are high and
inflow from financing Activities means company can finance its growth. The bar of
operating activities is higher when compared to other activities.
CFO ($226 thousand) >CFI (-$1,398) + CFF ($969)
Hence, company can self-finance its own investments.
 Funding of Investments: The Funding of Investments as shown by the graph is
done by both Cash Flow from Operations and Cash Flow from Financing
Activities.
 Cash Position of the Company: The Cash Position of the Company is Negative
which is calculated by adding CFO+CFI+CFF= Negative.

Question 2

2A: Operating Working Capital=Account Receivables + Inventory - Accounts 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: Operating Working Capital/Sales Ratio:

Year 2002 2003 2004 2005 2006E

Operating Working Capital 4,540 4,227 5,122 6,917 8,894

Sales 24,652 26,797 29,289 35,088 42,597

 OWC/Sales Ratio 0.184 0.158 0.175 0.197 0.209

2C: DIO = Inventory/Cost of Goods Sold per day:

Years Ending December 31 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
Cost of Goods Sold per
57 60 66 80 98
day= COGS/360 days
DIO 54 46 48 41 39

DSO = Accounts Receivables/Sales Revenue per day:

Years Ending December 31 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
Sales Revenue per
69 75 81 98 118
day=Sales/360 days
DSO 51 59 84 105 123

DPO = Accounts Payable/COGS per day:

Years Ending December 31 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
Cost of Goods Sold per day=
57 60 66 80 98
COGS/360 days
DPO 36 50 74 83 96

2D: The Implication of Long Credit given to dealers lead to the Negative Change in cash
which is not profitable for the company. If there is a delay in payment by the customers,
then the OWC is renewed and requirement for OWC increases which causes loss for the
company. The OWC is increasing which states that sales are done but the dealers are
delaying the process. DSO is in Increasing Trend, But DIO is decreasing slowly meaning
sales are good.

Question 3
Economical balance sheet:

Capital Employed = Fixed Assets + Operating Working Capital

Capital Invested = Shareholders Equity + Net Debt - Cash

Economical Balance Sheet (in $ thousand, some numbers are rounded)

At December 31 2002 2003 2004 2005 2006E
Plant, Property, & Equipment
2,257 2,680 2,958 3,617 4,347
(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
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
Capital Employed 7,892 9,301 11,578 14,032 16,738
Current Portion of Long-term
315 352 525 730 649
Debt
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
Cash 705 1,542 1,818 2,158 1,955
Capital Invested 7,892 9,301 11,578 14,032 16,738
Question 4

4A: Variable Margin = (Sales revenue-cost of goods sold)/Sales

Operating Margin = Operating Income/Sales

Return on Equity = Net Profit/Owner’s Equity

Return on Average Capital Employed = Earnings after taxes before interest/ {(Opening
capital employed + Closing Capital Employed)/2}

(in $ thousand, some numbers are rounded)

Year 2002 2003 2004 2005 2006E
Sales 24,652 26,797 29,289 35,088 42,597

Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100

Earnings before 1,641 2,338 2,408 2,836 3,018

Interest & Taxes
Interest 187 349 440 547 658

Earnings before Taxes 1,454 1,989 1,968 2,289 2,360

Taxes 264 696 689 801 826
Earnings after taxes
before interest 1,344 1,520 1,565 1,843 1,962
Net Income 1,191 1,293 1,279 1,488 1,534
Average Capital
Employed 8,282 10,491 12,872 15,460 18,043

Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563

Variable Margin as
percentage 17% 19% 18.60% 18.50% 17.60%

Operating Margin as
percentage 6.66% 8.72% 8.22% 8.08% 7.09%

Return on Equity as
percentage 23.70% 21.23% 17.90% 17.85% 16.04%

Return on Average
Capital Employed as
percentage 16.23% 16.19% 13.40% 13.01% 11.71%
 4B: The trend in RoE from 2002 to 2006 (E) shows decreasing over the years.

Reason for decreasing in RoE is the decrease in performance of the operations of the
company. The performance of operations of the company measured using Return on
Capital Employed. RoCE for the company is decreasing over the years:

RoCE:

2003 2004 2005 2006E

22.29% 18.71% 18.34% 16.73%

4C: The trend in RoACE from 2002 to 2006 (E) shows decreasing over years.

The Drivers for RoACE are Operating margin and Efficiency. The reason for decreasing
RoACE is the decrease in Operating margin of the company. Operating Margin of the
company is decreasing over the years. In 2003, the operating margin was 8.72% and in
2006 (E) it reduced to 7.09%

Question 5

Pros of the GetCeres Program:

Get Ceres program sales had increased to $35.1 million dollars in 2005 to $42.6 million
in 2006, approximately 80% of sales were to dealers.

Cons of the GetCeres Program:

Regardless of the payment terms given to the dealers, the payment were delayed by the
customers to 120 days which affected the business drastically. Many dealers did not pay
until they sold the product.

Recommendation:
Though The Idea of The GetCeres program was exciting but I would not recommend to
continue with this program as the long term debt taken by the company will land the
company paying higher interest and will affect the profit margins and the dealers are
also facing problems in managing the inventory as the sales increase which can affect
the dealers to invest in more.