Why has the stock price fallen despite the fact that net Income has Increased over the periods under review? The stock price has fallen because the shareholders were worried about Increasing debts and liabilities, that adding two manufacturing factories created and because of how much excesses inventory was created. Both of these changes would result in interest change of 44,000 to 1 55,000 that the company would have to pay, that impact on the company’s future earnings hurts the company’s image to stockholders causing them to worry. 2.
Tabulate your results and briefly comment on the liquidity position of the company between the two periods. 2004 2003 Absolute Liquidity 5/895 = 0. 005:1 = 40/355 = 0. 1 From looking at the absolute liquidity ratios of the firm we would say that the firm is not very liquid at the moment due to the low amount of cash that is on hand and the increase in accounts receivable and inventory from the previous year. When comparing the previous year to this year we can see that the absolute liquidity has decreased by at least half meaning that the company Is half as liquid this year as It as In the previous year. . How do the market-to-book ratios compare over the two periods and interpret the change in your results. Market-to-book ratio 100/600 = 1 . 83 =1400/600 = 2. 33 In 2003 we can see that the Market-to-book ratio was 2. 33, meaning that the shareholders’ Investment was being multiplied by a value of 2. 33. In 2004 the Market- to-book ratio declined: due to the decrease in the market value of equity, to 1. 83. This year before, but it is still greater than 1 which means that it is still worth more than what they originally invested in the company for. . The board of directors is not clear as to why the cash balance has dropped so much despite the increase in sales and the gross profit margin. Based on the cash flow statement, what should Jay tell the board? Jay should inform the board that yes they have increased sales and the profit margin has increase but in order to do so a lot of their customers bought on credit and although they currently only have $5,000 in cash on their balance sheet, they also have $540,000 in accounts receivable that has still yet to come in.
The free cash flow to creditors is also negative due to the increase in long term debit that the company incurred in order increase the net working capital and increase sales and inventory. Lastly the free cash flow to dockworkers, this is also negative due to the fact that there is a lot of new equity from retained earnings. 6. Calculate the net working capital of the company relative to sales for each of the two years.
As seen in question 2, the growth of the networking capital has a negative impact on the company’s liquidity, because networking capital locks up money. 7. Should the shareholders be concerned about the drop in cash flow, why and why not? Should they be happy with the increase in earnings per share? Explain. To answer this question the long- and short-term should be considered. In the short term the shareholders should be concerned about the solvency (liquidity) of the Signal Cable Company and should monitor the development of the cash balance and further financial transactions of the company.
Another critical factor is the high rate of capital lock up. To follow the actual cash situation they should monitor the cash ratio. Long-term investors are mostly interested in the progress of the profit. The Signal Cable Company has increasing its sales, net income and earnings per share* over the last few years. A decrease of cash flow or even a negative cash flow is not a very severe problem as long as the company growth is constant. The prospects of the many are positive, if the market continues the positive developments. Earnings per share increased because the net income increased from $ 124,700. 3 to $143,100 and the net income divided by a constant number of shares (200,000) results in an increase of the earnings per share. 8. Determine the internal and sustainable growth rates for the company and interpret your results. 9. If you were a loan officer in charge of evaluating the performance of this company will you consider providing additional loan for this company? Provide the rationale, based on your analysis, why you may or may not grant credit.
