Financial Case Analysis: Star River
Jon Bennett Star River Case Analysis Page 1 of 7 FIN 461: Spring 2008/9
Initial Assessment: An initial look at the ratio analysis reveals that the annual sales-growth rate has been holding around 15%. This is perhaps the only good news from the analysis. A performance discontinuity makes its appearance in FY 2000 as a drop in operating margin. This was a result of a 21% increase in production costs and expenses and a 20% increase in admin and selling expenses. There was also an inexplicable 95% increase in inventory. This jump in inventory and operating expenses appears to have been financed through debt, as the debt/equity and debt/total capital ratios increased during this period. Since the sales growth rate has held steady, there has been …show more content…
These were forecast using the percent-of-sales method, averaging the most recent two years to provide the primary ratios, with a few exceptions. This forecast shows that while maintaining the current levels of operating efficiency, depreciation of existing equipment, and purchasing the new DVD equipment will require additional funds on the order of SGD 11M for 2002 and a further 25M in 2003. This means that Star River cannot pay off its loan in a reasonable period. Sensitivity analysis shows that, while maintaining the current sales growth rate of 15%, the need for additional funds in 2002 is 2003 are relatively insensitive to operating expenses, requiring that operating expenses, as a percentage of sales, be reduced from 50% to below 40% in 2002, and reduced further in 2003, in order to avoid the need for additional …show more content…
In particular, low morale in the production department due to the expected high over time requirements for the next three years could increase the turnover rate in that department. If we were to lose key people in this department we may find ourselves facing both an outdated and unreliable packaging machine and a lack of people experienced in repairing it and keeping it running. Recreating this experience while maintaining the necessary near-peak output from the machine is likely to cause missed shipments to customers, damage to our reputation in the industry, and potential loss of repeat business. It is also well-documented that sustained overtime operations result in higher accident rates and thus higher medical insurance
Initial Assessment: An initial look at the ratio analysis reveals that the annual sales-growth rate has been holding around 15%. This is perhaps the only good news from the analysis. A performance discontinuity makes its appearance in FY 2000 as a drop in operating margin. This was a result of a 21% increase in production costs and expenses and a 20% increase in admin and selling expenses. There was also an inexplicable 95% increase in inventory. This jump in inventory and operating expenses appears to have been financed through debt, as the debt/equity and debt/total capital ratios increased during this period. Since the sales growth rate has held steady, there has been …show more content…
These were forecast using the percent-of-sales method, averaging the most recent two years to provide the primary ratios, with a few exceptions. This forecast shows that while maintaining the current levels of operating efficiency, depreciation of existing equipment, and purchasing the new DVD equipment will require additional funds on the order of SGD 11M for 2002 and a further 25M in 2003. This means that Star River cannot pay off its loan in a reasonable period. Sensitivity analysis shows that, while maintaining the current sales growth rate of 15%, the need for additional funds in 2002 is 2003 are relatively insensitive to operating expenses, requiring that operating expenses, as a percentage of sales, be reduced from 50% to below 40% in 2002, and reduced further in 2003, in order to avoid the need for additional …show more content…
In particular, low morale in the production department due to the expected high over time requirements for the next three years could increase the turnover rate in that department. If we were to lose key people in this department we may find ourselves facing both an outdated and unreliable packaging machine and a lack of people experienced in repairing it and keeping it running. Recreating this experience while maintaining the necessary near-peak output from the machine is likely to cause missed shipments to customers, damage to our reputation in the industry, and potential loss of repeat business. It is also well-documented that sustained overtime operations result in higher accident rates and thus higher medical insurance