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SIGNAL CABLE COMPANY
Cash Flow Analysis
Student: Maja Dimceva
CONTENT: Signal Cable Company, the current situation Income Statement Balance Sheet Questions Answers'
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SIGNAL CABLE COMPANY The company was on an expansion path and
had branched off into the fiber optics business.
The competition was not too serious. Due to the expectation of increased demand for fiber optic communications, the company had established two additional manufacturing facilities, and increased its inventory.
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SIGNAL CABLE COMPANY
Over the past few years, Signal Cable Company had quite a run up in profits, and then when the accounting statement were prepared for the current year, the results were not like they expected, they showed a lower profitability.
Not only the profit was low, but there was a serious drop in the cash balance, and also the company stock price had fallen from 7$ to 5.50$ per share.
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SIGNAL CABLE COMPANY
This concern was primarily important since the firm had been expecting to raise some short-term capital in the immediate future. The president of the Signal Cable Company asked from Jay to prepare a report explanation for the financial condition of the firm.
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INCOME STATEMENT
2001 2000
Net Sales 2,050,000 1,678,894
Cost of Goods sold 1,537,500 1,343,115
Depreciation 79,000 51,000
Selling & Administrative expenses 40,000 32,945
Earnings Before Interest and Taxes 393,500 251,833.8
Interest Paid 155,000 44,000
Taxable Income 238,500 207,833.8
Taxes (40%) 95,400 83,133.52
Net Income 143,100 124,700.3
Dividends 42,930 37,410.08
Addition to Retained Earnings 100,170 87,290.26
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BALANCE SHEET
2001 2000
ASSETS
Cash 5,000 40,000
Accounts Receivable 540,000 200,000
Inventories 1,300,450 650,000
Total Current Assets 1,845,450 890,000
NWC 950,450 535,000
Gross Fixed Assets 1,300,000 510,000
Accumulated Depreciation 232,000 153,000
Net Fixed Assets 1,068,000 357,000
Total Assets 2,913,450 1,247,000
LIABILITIES & EQUITY
Accounts Payable 145,000 55,000
Notes Payable 750,000 300,000
Total Current Liabilities 895,000 355,000
Long-term Debt 1,226,280 200,000
Common-stock and Paid in Surplus (200,000 shares outstanding)
600,000 600,000
Retained Earnings 192,170 92,000
Total 2,913,450 1,247,000
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QUESTION: Why has the stock price fallen in spite of the
fact that the Net Income has increased? The stock price does not depend from the
net income. The net income present the total earn money with the money that are wait to be paid, minus the expense to produce the earnings. The stock price has fallen because the liability of the company is high, they have money but on account receivable, they still wait to receive them. Also the stock price depend of the prices on the stock market, how they grow or fall, also from the demand for those stocks.
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QUESTION: How liquid would you say that this company
is? Calculate the absolute liquidity of the firm. How does it compare with the previous year’s liquidity position?
Absolute liquidity is represented by cash and near cash items. It is a ratio of absolute liquid assets to current liabilities.
Absolute Liquid Ratio = Absolute Liquid Assets / Current Assets
ALR=5,000+540,000/1,845,450 = 0.29
This represent that 29 cents worth of absolute liquid assets are considered sufficient for one dollar worth of liquid liabilities.
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CONT’D
For the previous position the firm absolute liquid is:
ALR=40,000+200,000/890,000 = 0.26 Here we can see that 26 cents, less from the
current year for about 3cents, worth of absolute liquid assets are considered sufficient for one dollar worth of liquid liabilities.
So, the current year 2001, is more liquid than the 2000year.
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QUESTION:
How does the market value of the stock compare with its book value? Is the book value accurately reflecting the true condition of the firm?
By dividing the net worth with the number of shares outstanding, the book value per share is got. The book value shows us what the shareholders' stake is worth.
The market value of a company's share refers to the price that is quoted in a recognized stock exchange that deals with the shares of the company.
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CONT’D
Book value is the accounting value of a firm. It has this main uses:1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.
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CONT’D
Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand, market value is the current price at which you can sell an asset.
Also, the book value reflect the true value and condition of the company and it can change depend from the company grow, if the company weld grow than also the book value will grow.
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CONT’D
Market value is often different from book value because the market takes into account future growth potential.
Most investors who use fundamental analysis to pick stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to it's book value, net assets or some other measure.
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QUESTION:
The board of directors are not clear as to why the cash balance has dropped so much in spite of the increase in sales and the reduction in cost of good sold. What should Jay tell them?
The cash balance dropped down because more buyers are buying on account. So because of this the account receivable is high and the cash is low. This tell as that we have low cash despite the sales has increase. So from here we can say that the money are on account and they will be paid for some period, but now we don’t have that money, but we will have it in the future, don’t know when.
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QUESTION: Measure the free cash flow of the firm.
What does it indicate? Net Income + Depreciation/Amortization – Changes in Working Capital – Capital Expenditure = Free Cash Flow FCF= Cash Flow From Operating Activity – Capital
Expenditure FCF=143,100 + 79,000 –(950,450-535,000)-40,000 FCF=-233,350
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CONT’D
Free cash flow represent the total cash available for distribution to owners and creditors after funding all worthwhile investment activities.
With another words, free cash flow (FCF) is cash flow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders,
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QUESTION: Calculate the net working capital of the
company for each of the two years. What can you conclude about the firm’s net working capital?
Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities.
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CONT’D
In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.
If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
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CONT’D Calculation of working capital: WC2001 = Current Assets – Current Liability WC2001 = 1,845,450 - 895,000 = 950,450
WC2000= 890,000 - 355,000 = 535,000
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CONT’D Form here we can see that the working capital increase
in 2001 for about 415,450$. An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.
In bout years we have a positive working capital which ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. 21
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THE END
Thank you for your attention!
