Report Strong TIe case
1. Introduction
This report provides analysis on the recent performance of Strong Tie Ltd. (STL) and provides suggestions for the management on the future actions.
2. Problem
Macro environment negatively affected sales from the start of the recession in late 2007, putting downward pressure on demand in the U.S. The company’s sales declined by 5.44% in 2008, which resulted in 3 year CAGR of 0.92%. Additionally, surge of global steel prices, which more than doubled over the past two years, and aggressive price competition have had an impact on the company performance by squeezing margins.
Analysis of the company’s Balance Sheets and Income Statement for the 3 year period ending 2008 is showing current financial situation of the company is not healthy. Due to continuous increase in expense accounts, both, Gross Profit and Operating Profit margins showed a downward trend, and are below the industry averages. The liquidity ratios (current and cash ratios) also declined over the three year period, while LTD to Total Capitalization ratio rose, which signals potential liquidity problem in the future and a higher risk of financial distress. Current ratio plunged to 3.13 in 2008 from 5 in 2006, compared with industry average of 4. The shift was mainly caused by decrease in cash and cash equivalents accounts. Consequently, cash ratio fell far below industry average of 0.5 to 0.03. Additionally, both ROA and ROE both deteriorated and are substantially lower compared to the industry averages. That suggests the recent investments into Net Fixed Assets to increase efficiency are not being used to the fullest.
Despite maintaining a leadership position in the market, in the recent years, STL’s market share has fallen from 70% to 60%, and price competition is only increasing due to rising competition from China for the standardized connectors. In addition STD’s biggest competitor Universal Connector, that currently has 30% market share replaced its U.S. based manufacturing
This report provides analysis on the recent performance of Strong Tie Ltd. (STL) and provides suggestions for the management on the future actions.
2. Problem
Macro environment negatively affected sales from the start of the recession in late 2007, putting downward pressure on demand in the U.S. The company’s sales declined by 5.44% in 2008, which resulted in 3 year CAGR of 0.92%. Additionally, surge of global steel prices, which more than doubled over the past two years, and aggressive price competition have had an impact on the company performance by squeezing margins.
Analysis of the company’s Balance Sheets and Income Statement for the 3 year period ending 2008 is showing current financial situation of the company is not healthy. Due to continuous increase in expense accounts, both, Gross Profit and Operating Profit margins showed a downward trend, and are below the industry averages. The liquidity ratios (current and cash ratios) also declined over the three year period, while LTD to Total Capitalization ratio rose, which signals potential liquidity problem in the future and a higher risk of financial distress. Current ratio plunged to 3.13 in 2008 from 5 in 2006, compared with industry average of 4. The shift was mainly caused by decrease in cash and cash equivalents accounts. Consequently, cash ratio fell far below industry average of 0.5 to 0.03. Additionally, both ROA and ROE both deteriorated and are substantially lower compared to the industry averages. That suggests the recent investments into Net Fixed Assets to increase efficiency are not being used to the fullest.
Despite maintaining a leadership position in the market, in the recent years, STL’s market share has fallen from 70% to 60%, and price competition is only increasing due to rising competition from China for the standardized connectors. In addition STD’s biggest competitor Universal Connector, that currently has 30% market share replaced its U.S. based manufacturing