• Seasonal business with some 60% of annual sales occurring from Aug-Dec
• Original pro forma figures are a no growth scenario including the seasonal sales pattern (might be a first pessimistic stance of the management as SureCut grew steadily during the past)
• Short-term financing usually for seasonal inventory built up from July – Nov
• Due to investment in plant modernization (USD 2.99mn capex planned in July+Aug 1995) company needs ST borrowings for financing gap of USD 1.16mn in Jun 1996
• USD 900,000 savings expected on COGS p.a. as a result of the plant modernization
• Besides the plant modernization the company plans depreciation equals capex
Intro analysis / remarks:
• The original plan shows a first red flag: working capital (here defined as inventory + acc. rec. – acc. payables) increases by USD 727 despite stagnating sales
• Sources & Uses for the 12 month planned are: • Expected savings of plant modernization are not included in the budget yet
• Our analysis for this case was focused on understanding the reasons for the company’s debt need and whether the reasons were properly addressed. We did not care that much about the actual debt need throughout the coming year (hence no need for preparing a detailed forecast) for the following reasons: o Despite shrinking margins (Net Profit margin for the last 9 months 9.9% down from 12.8% the year before) the company remains highly profitable o The company has a moderate level of debt (e.g. latest D/E ratio 53.8%) => further leverage potential o Vast majority of free cash flows is absorbed by dividends (USD 1.5mn p.a. = 45% payout ratio based on original budget), which can be reduced if the situation gets worse o The high inventory is the main driver for the increasing debt need (not loss financing). We do not expect the company’s products to be obsolete very fast thus the financing remains valuable underlied
Therefore we assume that the company would easily attract more