CASE 1:

ULTRA CABLE CORPORATION

Case Discussion
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Background Information
•Ultra Cable Corp. has been on an expansionary path
and opened several service centers.
•After quite a few years of rising profits, the firm has
experienced a severe drop in its net profit margin,
relative liquidity and cash balance…stock price dropped
from $35 to $25 per share.

©2018 McGraw-Hill Education

Concern
• 1. Stock price drop from $35/share to $25/share.

• 2. Cash balance had dropped from $100,000 to just

$12,500.

• 3. Where have all the dollars gone?

• Management team is thinking on raising some short-term

debt to fund its working capital.
Question 1
• Explain why Ultra Cable Corporation’s cash balance
has declined so precipitously this past year.
- The company has spent a significant amount of
money in inventory, and some of the money still in the
account receivable (they haven’t collected the money
from the clients).
- Some of the reasons might include potential
expansion no yet announced.
Question 2:
• Why has Ultra Cable’s stock price dropped so much
recently despite an increase in its revenues and its
earnings per share?
- It’s because they have acquired a significantly higher
long-term debt and current liability.
- However, they don’t have enough cash to cover the
liability since the cash has been used into inventory
acquisition. The account receivable has not been
collected yet.
- Based on the net income, there isn’t a significant rise
compared to last year, even though the revenue
increases by 1,000,000
- This is due to the increase of Interest Paid (which is
caused by the increasing Debt)
©2018 McGraw-Hill Education
Question 3:
• Evaluate the firm’s liquidity positions and compare them with
its liquidity position last year. (use current ratio, quick ratio
and cash ratio)

BALANCE SHEET Current Year Last Year

Cash Ratio 0.006 0.113

Current Ratio 2.062 2.507

Quick Ratio 0.609 0.676

- Only cash ratio decreases significantly due to the

significant increase in account receivable from 500,000
to 1,350,000
- Current ratio doesn’t change much because it includes
both inventory and account receivable.
- Quick ratio doesn’t change much because it includes
account receivable.
- however the current year’s receivable turnover is much
lower than last year and it takes more days to collect the
receivable compare to last year
Question 6
• Using the firm’s net working capital calculation for the
recent two years, what can you conclude about Ultra
Cable’s liquidity situation?

- They have positive NWC value, which means they have

enough current assets to cover their current liabilities.
However, the NWC doesn’t portrait how they portion
their current assets
- Their liquidity performance is lower than the previous
year.
- Their days sales in Inventory Turnover is 309 days
which means it takes more time to liquidate their
inventory if any urgent situation happen.
Question 7
Are the shareholders justified in being concerned about the
drop in the cash balance or should they be happy that the
earnings per share have increased?
Explain your answer.

Shareholders are concerned about a company's cash

balance drop despite increased earnings per share,
potentially due to cash flow issues, operational
inefficiencies, or poor financial management. However, the
great increase for Earnings Per Share deflects negative
considerations. Instead, it suggests a mid-long term
strategy which requires sacrifice liquidity over future
Higher earnings. So, they don’t have to concern much
about the drop of cash balance, since drop of cash
balance is due to the investment market expansion.
©2018 McGraw-Hill Education
● Assuming a scenario in which the company contains a poor
liquidity, but a higher EPS in comparison to the previous
year, we could assume an strategic managerial move.
Further plans to mitigate liquidity must be considered.
● On the other hand, having both a low liquidity and low EPS,
make us assume poor management of the company, which
requires special attention from the shareholders.

©2018 McGraw-Hill Education

Question 8
• In the EXCEL spreadsheet, please fill in the yellow portion
regarding to the financial ratio.
Interest Coverage Ratio 2.54 5.72

Profit Margin 6.98% 7.43%

Cash Ratio 0.006 0.113

Current Ratio 2.062 2.507

Quick Ratio 0.609 0.676

ROE 0.239 0.208

ROA 0.049 0.100

Total Debt Ratio 0.794 0.519

Time Interest Earned 2.539 5.724

Inventory Turnover 1.182 2.066

Total Asset Turnover Ratio 0.704 1.346