Astral Records Ltd 2

Astral Records Ltd., North America Case Study Analysis & Solution Astral CD Company Analysis (2012-09-11 23:40:52) 标签： 杂谈 This is not an article but more an assignment. I just want to post it here for later review.

Company internal analysis

From the income statement in Exhibit 1, people can see a steady growth tendency of the company's sale from 1990 to 1993, but what really should draw our attention is that net incomes in these four years did not show us a responsive and correlated increase, instead of which a mild decrease took place. Of course, the cost associated with selling process will increase when the sale goes up, cancelling out part of the revenue. Nevertheless, if the operating growth margin is lower when sale is, however, higher, we know that the operating expense has increased unproportionally while sale increases. For instance, the sale in 1991 is 28,822 and the sale in 1992 is 34,010. Weird as it is, compared with the operating margin in 1992, 6,476, that in 1991 reaches 7,109. Paying a closer look, we will find that with a sale increase as 18%, the production cost and expenses increased 33.3%. The problem is either the large scale production does not bring a better efficiency for the company or the manufacturing cost in 1992 increased substantially due to the cost increase of certain raw material, say plastic. Purely observing from the income statement, even if there is problem as I identified above, the company is still in an acceptable operating condition. It had enough net income to pay out dividends annually from 1990 to 1993 and reserved part of it as retained earnings. People may be worried that because the company probably has no better project or area to invest , it continuously pays out its disposable income as dividends, indicating a lack of future growth momentum.

Combining the income statement and the balance sheet, we can calculate different ratios, which helps to explain the financial or operational situation in specific areas. Below is a table for profitability ratios quoted from the Exhibit 3. Taking this part out, I want to carefully examine why the profitability of the company is continuously decreasing with time.

Years

1990

1991

1992

1993

Operating Profit Margin

23.4%

24.7%

19.0%

17.1%

Average Tax Rate

44.3%

40.3%

39.5%

39.0%

Return on Sales

7.9%

9.5%

5.7%

5.5%

Return on Equity

18.3%

20.9%

13.9%

14.5%

Return on Assets

4.4%

5.4%

3.4%

3.3%

I would like to take ROE as an example here because it can be broken down into different pieces and help to explain performances of different areas. Return on Equity = Debt Burden* Financial Leverage*Asset Turnover*Operational Profit Margin During this 4-year period, return on equity is decreasing, especially in 1992.

1990

1991

1992

1993

Return on equity

18.3%

20.9%

13.9%

14.5%

Debt burden

0.46015573

0.518444

0.373109

0.405169

Leverage ratio

4.145

3.841

4.146

4.35

Asset turnover

55.9%

57.5%

58.7%

60.3%

Operating profit margin

23.4%

24.7%

19.0%

17.1%

From this chart, we can easily distinguish that debt burden and operating profit margin are the two items that are responsible for the dramatic decrease of ROE in 1992. The decrease of operating profit margin has actually already been identified previously in the income statement analysis. Here, again, the point is proved. The debt burden ratio measures the cost of serving debt, indicating the degree of interest involved in debt borrowing transactions. From the equation of debt burden: NI/(NI+I), a relation that can be easily recognized is the smaller the ratio is, the bigger the debt burden is. The total liabilities increased by approximately 7,000, which is almost a 20 percent surge. Some other reasons may also aggravate this problem, such as the increase of interest rate. When the company increases its debt, investors want to know whether the company is liquid in the short term and solvent in the long run. Here is the table for current ratio and acid test ratio from Exhibit 3 as below.

Years

1990

1991

1992

1993

Current Ratio

1.01

1.05

1.14

1.21

Quick Ratio

0.39

0.41

0.39

0.36

From the current ratio, we can find that the current assets are just about enough to cover the current liabilities. Taking from this statistics, if everything goes just fine, the company should have no big problem dealing with its short-run liabilities. Nonetheless, the acid test ratio, or quick ratio, presents a quite different view. Quick ratio excludes inventory, which is often regarded as less liquid in current assets category, and shows a series of relatively low values, values lower than 50%. In this

case, if inventories cannot be liquidated fast enough, the company will run short of cash, resulting in default in debt payment. From the solvency perspective, the Debt/ Assets ratio shows that the company is definitely solvent in the long run because the debt only occupies around 50 percent of total assets.

Of course, here I can calculate all the turnover ratios including asset turnovers, accounts receivable turnover, accounts payable ratios, and inventory turnovers, or even calculate the cash conversion cycle, but because there are no comparison I can make with the sectors and industry. So, it is hard to draw any conclusion by simply using the data in this case. So, I cannot dig out any valuable information in the turnover parts. Even if I cannot compare it with other companies, the turnover ratios indicate a quite stable efficiency of the company's operating process.

Industrial Analysis

There are couple companies are highly competitive in the CD industry and are named in the case reading.

First of all, the Dickenson. Inc, having a long history in the market, just entered the CD manufacturing field, and the revenue resulted from CD selling occupies only 20 percent of its annual sales. So, Dickenson will not devote a large percentage of its energy competing with Astral. In addition, Dickenson's P/E ratio, 9, is relatively low in the industry, and its Beta, a measure of risk is higher than most of other companies in the same area. So, I do not think Dickson will bring a large pressure on Astral in the short run in terms of competition. Harris Beshel's stock is rated as AA level and the company itself is highly specialized in CD industry. While the low P/E ratio, 8 in this case, and low growth rate, 6%,makes it less attractive to investors. Even worse, a recent sharp decline causes investors to doubt on the company's future development, lowering their expectation of its performance. So, Harris Beshel also are not very competitive.

Donaldson Inc, just established company, is gaining its market share very rapidly. Its sale is about of the same amount of that of Astral. The company has good P/E ratio, 12, low beta, 1.2, and a rate level as AA. A lot of investors will be convinced that Donaldson has a great potential to grow even bigger. It is a strong competitor against Astral.

IBBEX Corp. enjoys an extraordinarily high P/E, 16 and annual growth rate, 10%. However, only 40 percent of its sale coming from selling CDs and its rating is not very good, Baa. Probably many investors will be willing to invest because of its astonishing high return. So, it can also be competitive to some extent.

Last, ZEPORT has a very high risk, 1.6 and a low rating as B. Its P/E ratio and annual growth rate are apparently not high enough to justify its high risk. Moreover, the company's focus has partially shifted from CD industry to other areas. So, this company won't be very competitive in the near future.

After analyzing all these companies, we see that the CD industry is actually a very diversified industry. It has low entries for companies to start from scratch and also low barrier to exit. Competition within such market is often high and companies have to continuously diversify their goods and services to attract customers, and this is probably what Astral has to do in terms of maintaining its competitiveness.

Material quoted from the case study done by University of Virginia, Astral Records Ltd., North America: Some Financial Concerns

Astral CD Company Analysis (2012-09-11 23:40:52)

标签： 杂谈

This is not an article but more an assignment. I just want to post it here for later review.

Company internal analysis

From the income statement in Exhibit 1, people can see a steady growth tendency of the company's sale from 1990 to 1993, but what really should draw our attention is that net incomes in these four years did not show us a responsive and correlated increase, instead of which a mild decrease took place. Of course, the cost associated with selling process will increase when the sale goes up, cancelling out part of the revenue. Nevertheless, if the operating growth margin is lower when sale is, however, higher, we know that the operating expense has increased unproportionally while sale increases. For instance, the sale in 1991 is 28,822 and the sale in 1992 is 34,010. Weird as it is, compared with the operating margin in 1992, 6,476, that in 1991 reaches 7,109. Paying a closer look, we will find that with a sale increase as 18%, the production cost and expenses increased 33.3%. The problem is either the large scale production does not bring a better efficiency for the company or the manufacturing cost in 1992 increased substantially due to the cost increase of certain raw material, say plastic. Purely observing from the income statement, even

if there is problem as I identified above, the company is still in an acceptable operating condition. It had enough net income to pay out dividends annually from 1990 to 1993 and reserved part of it as retained earnings. People may be worried that because the company probably has no better project or area to invest , it continuously pays out its disposable income as dividends, indicating a lack of future growth momentum.

Combining the income statement and the balance sheet, we can calculate different ratios, which helps to explain the financial or operational situation in specific areas. Below is a table for profitability ratios quoted from the Exhibit 3. Taking this part out, I want to carefully examine why the profitability of the company is continuously decreasing with time.

Years

1990

1991

1992

1993

Operating Profit Margin

23.4%

24.7%

19.0%

17.1%

Average Tax Rate

44.3%

40.3%

39.5%

39.0%

7.9%

9.5%

5.7%

5.5%

Return on Equity

18.3%

20.9%

13.9%

14.5%

Return on Assets

4.4%

5.4%

3.4%

3.3%

Return on Sales

I would like to take ROE as an example here because it can be broken down into different pieces and help to explain performances of different areas. Return on Equity = Debt Burden* Financial Leverage*Asset Turnover*Operational Profit Margin During this 4-year period, return on equity is decreasing, especially in 1992.

1990

1991

1992

1993

18.3%

20.9%

13.9%

14.5%

0.46015573

0.518444

0.373109

0.405169

Leverage ratio

4.145

3.841

4.146

4.35

Asset turnover

55.9%

57.5%

58.7%

60.3%

Operating profit margin

23.4%

24.7%

19.0%

17.1%

Return on equity Debt burden

From this chart, we can easily distinguish that debt burden and operating profit margin are the two items that are responsible for the dramatic decrease of ROE in 1992. The decrease of operating profit margin has actually already been identified previously in the income statement analysis. Here, again, the point is proved. The debt burden ratio measures the cost of serving debt, indicating the degree of interest involved in debt borrowing transactions. From the equation of debt burden: NI/(NI+I), a relation that can be easily recognized is the smaller the ratio is, the bigger the debt burden is. The total liabilities increased by approximately 7,000,

which is almost a 20 percent surge. Some other reasons may also aggravate this problem, such as the increase of interest rate. When the company increases its debt, investors want to know whether the company is liquid in the short term and solvent in the long run. Here is the table for current ratio and acid test ratio from Exhibit 3 as below.

Years

1990

1991

1992

1993

Current Ratio

1.01

1.05

1.14

1.21

Quick Ratio

0.39

0.41

0.39

0.36

From the current ratio, we can find that the current assets are just about enough to cover the current liabilities. Taking from this statistics, if everything goes just fine, the company should have no big problem dealing with its short-run liabilities. Nonetheless, the acid test ratio, or quick ratio, presents a quite different view. Quick ratio excludes inventory, which is often regarded as less liquid in current assets category, and shows a series of relatively low values, values lower than 50%. In this case, if inventories cannot be liquidated fast enough, the company will run short of cash, resulting in default in debt payment. From the solvency perspective, the Debt/ Assets ratio shows that the company is definitely solvent in the long run because the debt only occupies around 50 percent of total assets.

Of course, here I can calculate all the turnover ratios including asset turnovers, accounts receivable turnover, accounts payable ratios, and inventory turnovers, or even calculate the cash conversion cycle, but because there are no comparison I can make with the sectors and industry. So, it is hard to draw any conclusion by simply using the data in this case. So, I cannot dig out any valuable information in the turnover parts. Even if I cannot compare it with other companies, the turnover ratios indicate a quite stable efficiency of the company's operating process.

Industrial Analysis

There are couple companies are highly competitive in the CD industry and are named in the case reading.

First of all, the Dickenson. Inc, having a long history in the market, just entered the CD manufacturing field, and the revenue resulted from CD selling occupies only 20 percent of its annual sales. So, Dickenson will not devote a large percentage of its energy competing with Astral. In addition, Dickenson's P/E ratio, 9, is relatively low in the industry, and its Beta, a measure of risk is higher than most of other companies in the same area. So, I do not think Dickson will bring a large pressure on Astral in the short run in terms of competition.

Harris Beshel's stock is rated as AA level and the company itself is highly specialized in CD industry. While the low P/E ratio, 8 in this case, and low growth rate, 6%,makes it less attractive to investors. Even worse, a recent sharp decline causes investors to doubt on the company's future development, lowering their expectation of its performance. So, Harris Beshel also are not very competitive.

Donaldson Inc, just established company, is gaining its market share very rapidly. Its sale is about of the same amount of that of Astral. The company has good P/E ratio, 12, low beta, 1.2, and a rate level as AA. A lot of investors will be convinced that Donaldson has a great potential to grow even bigger. It is a strong competitor against Astral.

IBBEX Corp. enjoys an extraordinarily high P/E, 16 and annual growth rate, 10%. However, only 40 percent of its sale coming from selling CDs and its rating is not very good, Baa. Probably many investors will be willing to invest because of its astonishing high return. So, it can also be competitive to some extent.

Last, ZEPORT has a very high risk, 1.6 and a low rating as B. Its P/E ratio and annual growth rate are apparently not high enough to justify its high risk. Moreover, the company's focus has partially shifted from CD industry to other areas. So, this company won't be very competitive in the near future.

After analyzing all these companies, we see that the CD industry is actually a very diversified industry. It has low entries for companies to start from scratch and also low barrier to exit. Competition within such market is often high and companies have to continuously diversify their goods and services to attract customers, and this is probably what Astral has to do in terms of maintaining its competitiveness.

Material quoted from the case study done by University of Virginia, Astral Records

Ltd., North America: Some Financial Concerns