Analyzing the Manner in Custom Snowboard Inc - Case Study Example

Table of Contents Introduction 2 Key Financial Aspect for loan 2 Manner to reduce financial risk 3 Analysis of Ratios 3 Historical Analysis of Financial Performance 5 Future Performance 5 Improvement 6 Internal & External Risk facing business 6 Process to mitigate the risk 8 Returns from procuring the new plant in Europe 9 Expansion opportunity in Europe 11 Conclusion 11 References 12 Introduction This report looks to analyze the manner in Custom Snowboard Inc is looking to expand in Europe which will thereby look at analyzing the different risk, return, ratios, performance and process through which useful business decisions can be taken. This will help to develop a framework through which the overall process of monitoring will improve and the business will be able to take decisions after evaluating different factors. This will also help to bring a change in the manner decisions are taken and will bring a complete change in the manner the business works. Key Financial Aspect for loan The loan provider while looking to provide loan will look into profitability, liquidity and solvency ratios so that the banker can understand the manner in which the business is performing and can take decisions based on it. The different information will provide different information such as Profitability Analysis: This will help to understand the manner in which the business is able to make profits from the business based on their past operations. This will help the banker to understand the manner in which the business has been able to use the resources and will help to determine the future direction through which better efficiency will be achieved Liquidity Analysis: This will help to determine the liquidity position of the business and will help to maintain financial stability so that the business is able to meet its financial need. This will help the banker to understand that the business will be able to pay off the loan and interest on the loan so that they are able to determine the manner in which effectiveness will be achieved Solvency Analysis: This will determine the ability of the business to determine the manner in which the business will be able deal with the long term debt and the ability of the business to determine the manner in which long term debt is maintained. This ratio will ensure that the banker is able to manage the resources and ensure proper utilization of the resources. Manner to reduce financial risk The banker can reduce the financial risk for the business by looking at the following dimensions Ensure timely payment of interest on debt as it will help the banker to gain the relevant interest from the market and will reduce the chances of bad debts Focus on cash and monitor the activities so that the business is able to find out the manner in which liquidity is maintained within the system Carry out a business analysis so that the different risk can be identified and appropriate strategies to mitigate the risk can be ensured Analysis of Ratios The banker will look at the following ratios to determine the manner in which the safety of their funds and liquidity will be maintained Liquidity Ratios: The short term current ratio shows that the business has more liquidity than required as the ratio for year 13 is 6.82 and year 14 is 5.84. When compared to the competitor Winter Sports whose ratio is 4.2 shows sufficient liquidity. This will help the business to pay off its debt easily and will help to maintain the required liquidity within the system (Filbeck & Krueger, 2005). The acid test ratio which is tested after reducing the current stock shows a strong ratio as it stands at 3.64 in year 14 and 4.66 in year 13. This is better compared to the competitor which stands at 3.4. This shows that the business has sufficient liquidity and will be able to ensure that the short term interest is paid off easily. Profitability Ratios: The gross profit margin stands at 30.4% which is healthy and shows that the direct cost associated with the product is low. This in comparison to the competitor is slightly low as Winter Sports has the ratio at 32.1%. The worrying factor is the net profit ratio which has a strong dip and stands at 0.3% in year 14 and 1.5% at year 13. The competitor on the other hand has a ratio of 5.2%. This is a worrying aspect and shows that the business has a lot of indirect expenses which needs to be controlled (Eljelly, 2004). The overall effectiveness of the daily working style is thereby hampered and reflects an area where the business needs to improve as it could strongly move towards negative returns and will thereby impact the long term growth potential. Solvency Ratios: The solvency ratio shows that the business has a good management of debt and equity where both debt and equity is properly managed. This ensures that the business has an opportunity of raising finance through debt and the process will also ensure that the business is able to maintain proper debt financing. The debt ratio is further high compared to the competitor which stands at 38% but still the ratio is not a worrying one and represents proper mix of equity and debt which will ensure that the debt will be paid off on time (Antony, 2004). Historical Analysis of Financial Performance The horizontal analysis shows that performance has dipped from year 12 to year 13 and from year 13 to year 14. This is seen by the fact that the operating profits have decreased by 23.56% in year 13 and 52.91% in year 14 when compared to the previous year. A look at the details shows that sales have decreased in year 14 by 3.4% whereas in year 13 it increased slightly. The business however has been able to manage the cost of good sold in the same proportion and has been able to reduce it by the same manner. This has impacted the gross profit in a similar manner shows a dip in the manner the business has dipped. In a similar manner and in the same proportion a dip has been witnessed in transportation, sales commission and advertising expenses (Deloof, 2003). The general and administrative expenses on the other hand have increased which has thereby impacted the manner in which changes have been witnessed. In a similar manner the balance sheet items have shown a dip in year 14 as compared to year 13 which has resulted in a dip in both the equity and the liabilities and is an area which needs to be considered so that the business is able to gain effectiveness. Overall the business has witnessed a dip and needs to work at improving the performance so that better results can be achieved. Future Performance The future performance shows an opportunity of improvement as keeping the base year as 14 a projection of 103% sale in year 15, 102% in year 16 and 103.7% in year 17 is expected. This will help to ensure that the sales will improve by 6600034 in year 15, 6535956 in year 16 and 6647452 in year 17. This shows that the business performance will thereby improve in the future and provides an scope through which the overall performance will improve. This ensures that the performance will improve in the future and will ensure that the overall effectiveness of the business will improve. Improvement The business can improve the manner in which they carry out their business by working on different dimensions which will help to gain efficiency and reduce the risk through the following Activity Based Costing: The business needs to use the process of activity based costing so that the business is able to identify the cost for each products correctly. This will help to develop different pool centres and will help to allocate the different cost directly to the products. This will thereby improve the overall effectiveness and will reduce the chances of incorrect allocation and will help to determine the products which provides profits and loss so that the future decisions can be taken based on it regarding the products which need to be carried on and areas which need to be closed. Just In Time: The business needs to look at using the process of just in time technology so that the business is able to ensure that the products are procured at the appropriate time. This will help the business to ensure that through the process of just in time the business will be able to manage the resources and finances in a proper manner and will thereby reduce the overall effectiveness through which better management of the resources can be ensured Internal & External Risk facing business The business faces different risk which needs to be managed so that the business is able to develop strategies through which better effectiveness will be achieved. The different internal risks which the business faces are as Stability: The business faces an internal risk of managing the finance, the debt obligation, return on capital so that financial viability and stability can be managed. This is an aspect which the business needs to manage so that different risk for the business is managed and the risk for the business is mitigated for better growth of the business Resources: The business faces risk of managing the resources so that they are able to ensure effectiveness in managing the resources and the business is able to ensure better returns for the business. Managing the resources will help to ensure that the business will be able to maximize the gains and ensure that the overall effectiveness is multiplied Politics & Management: The business needs to manage the internal risk associated with motivation of employees, the working culture and environment so that people remain committed and work towards a common goal. This is a risk which the management needs to address and develop policies through which the business will be able to perform better In addition to the different internal risk the business also faced different external risks which are as Economic Risk: The business has to deal with the economic risk associated with demand, supply, inflation, growth and other factors. This are beyond the control of the humans and has an impact on the long term prospect of the organization as the decisions can be impacted in a positive or negative manner depending on the risk associated with economic changes Technological Risk: The business further has to deal with the risk associated with the change in technology as the business needs to identify ways through which they will be able to absorb the technological changes and needs to develop proper strategies which will help to ensure that the business is able to gain better effectiveness and manage the risk properly Political-Legal Risk: The business faces risk associated with political and legal framework as any changes on the political or legal framework will bring a change in the manner the decisions are taken and the business will have to deal with policies which will help to reduce the risk. This is an aspect which will multiply the overall effectiveness and will thereby require that framework is developed which will ensure that the risk is mitigated. Process to mitigate the risk The business needs to develop strategies which will look at dealing with the different risk. External risk are beyond the control and the business has to live with it but strategies need to be managed to ensure that the other internal risk reduces and it can be achieved through the following Maintain Liquidity: The business needs to maintain liquidity so that the financial viability of the business remains. This will help to deal with the different risk associated with liquidity and will provide an opportunity through which better effectiveness will be achieved. Monitoring: The business needs to improve the process of monitoring so that the business is able to develop framework and policies through which the different risk and progress of the business can be monitored. This will help to develop policies in relation to risk and ensure that the resources are used in the best possible manner. This will also help to improve effectiveness and will ensure that the business is able to reduce the chances of failure Improved Management: The business needs to ensure that the process of management is effective and creates an environment where the different business process and dimensions are able to work in close tandem with one another. This will help to reduce the process through which the business will be able to improve the process of monitoring and ensure that the politics and management issues are effectively dealt. Returns from procuring the new plant in Europe The organization is looking to expand its business and is looking at setting up a new plant in Europe. The organization based on the future expected demand and growth has identified whether the business will be a favourable one or not. To analyze it the business has calculated the Net Present Value (NPV) and the Internal Rate of Return (IRR) so that the important information regarding the financial viability can be gathered. NPV is the present value of the future estimated income when discounted by a certain rate of interest whereas IRR is the internal rate of return which the business expects to make so that the different cost for the business can be covered and the business is able to make profits from the venture. Both NPV & IRR are important determinants because it helps to evaluate the future earnings by observing the different risk and aspects which will have an influence on the business so that appropriate steps can be developed through which the risk can be reduced. This provides an opportunity to determine whether investing would be a good decision after considering the risk and return and thereby ensures that the business is able to look at different factors before actually investing the money and ensures that the decisions can be taken wisely. An analysis of the NPV for future years shows that after a period of 5 years the business will be able to provide a profit of $83,373 when converted to the present value using a PV factor of 10%. The PV of 10% is the minimum expected cost of capital which has been considered. This shows that the investment of 1000000 fetches 1083373 ensuring that the business is able to make profit and the decision to expand is wise and will help to improve the returns for the shareholders and the business on a whole. In a similar manner the IRR shows that the rate of return for the period is 12.2% is achieved and the business is able to earn more than the cost of capital which is 10% ensuring that the business will be able to ensure better returns from their operations. Now when the business has identified the opportunity to be successful it is important to analyze whether purchasing or leasing will be a better decision for the business so that proper finance can be managed. The purchase versus leasing decision shows that if the business purchases the asset then the present value of cash outflow considering the cost of capital to be 10% is 809409 whereas the leasing agreement results in the cash outflow to be 653355. This shows that the leasing decision results is fewer cash outflow in comparison to the purchase decision. This makes it a wise decision to lease the asset as it will result in a gain of 156054 of less cash outflow. This would thereby be beneficial for the business and will help to deal with the financial requirements as the business will be better placed and will have more resources at their disposal. Expansion opportunity in Europe The expansion strategy in Europe can be based either on the strategy of merging or acquiring. This makes it imperative that both the options are evaluated and the business decision is taken based on it. Considering a situation where merger takes place between Custom Snowboards & European Snowfun it is seen that the EPS of Custom Snowboard decreases from 0.98 to 0.92 after the merger highlighting that the return for the shareholders has decreased. This could thereby have an impact on the morale of the stakeholders and could result in a situation where the business will not be in a place through which better gains can be achieved. While looking at the decision of an acquisition it is seen that the offer price for the acquisition is $720000 where as the present value for the same acquisition is $732522. This shows that the business through the process of acquisition is able to make a gain of 12522 which ensures that the business will be able to gain from the deal. The overall process thereby requires that the business should look at an acquisition strategy so that they are able to gain from it and will also help to ensure that the process helps to provide financial gains. Conclusion This paper thereby analyzes the different aspect for Snow Board by analyzing the financial statement and providing areas and directions through which the business will be able to get the loan. The paper also shows the different areas of concerns and the strategies which needs to be taken in the future so that the business is able to maximize the overall chance of being effective and will help to increase the chances of being successful and garner better profits over a longer period of time. References Antony, T. (2004). Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. (2004). Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market. International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Read More