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Carlton Ltd Case Solution

Introduction:-

Caltron Ltd was founded in 1971 by the Jenny Jones, the owner of the Pulsar computer with the aim to supply the electronic calculators to the scientific and business communities. Despite the rigorous competition in the industry, Jones managed to survive Pulsar a very profitable market leader.

Problem statement:-

During 2001, Caltron Ltd feltintensepressure from the independent board members. Furthermore, the company’s performance worsenedascompared to its competitors. Moreover, increased competition and low-wage developing countries caused the problem.

Analysis:-

When calculators were first launched,they were profitable. The calculators weresold at high margin because at that time there was no competition. However, now the competition has increased, resulting in companies are adopting the high volume, low-cost strategy.

Due to the increased competition to maintain the low cost of the calculators, in 2002 and 2003, Caltron heavily invested in new equipment to automate the production process and reduce the labor costs. Furthermore, new plants becamedifficult to install and it required training for workers which require lots of time. By 2003, the factory operations improved.

Moreover, in order to increase the revenue, Caltron had increased the sales force and administrative staff. The sales force was on the straight salary as per the collective agreement.

Financial analysis:-

I have calculated the financial ratios and its commentary, which will help you in your final project.

Ratio analysis:-

Current ratio:-

By looking at the current ratio, it seems that the current ratio has decreased from 2.99 (2001) to 1.39 (2003) over the two years periods. This shows that the company has decreased its ability to pay its liability. However, the 1.39 is also enough to pay its liabilities. When comparing the current liabilities of Caltron Ltd with the industry average, the performance seems to be poor as the industry average current ratio is 2.7 times.

Cash ratio:-

Cash ratios show the liquidity of the company that how much cash is available to pay is a liability. The cash ratio of the company is 0.01 which indicatespoor performance as the industry average is 0.45. The reason of the decreased the ratio is that the company has heavily invested in plants to automate the production process.

Inventory turnover in days:-

Furthermore, inventory days arealso increasing on yearly basis from 77 days (2001) to 106 days (2003), the industry average is 60 days. The increase in the inventory days indicates that there may be outdated stock or obsolete stock because the company is operating in adynamic environment.

Account receivable turnover in days:-

The ratio has also increased from the 37 days to 46 days, having industry average ratio of 32 days. This indicates that recovery department of Caltron is unable to recover due amount from the customers. However, there may be other reason that some of the receivables may be bad debt.

Accounts payable turnover in days:-

The payable days havesignificantly increased from 22 days (2001) to 59 days (2003). This again clearly indicates the cash problems. Furthermore, this may create problems in future that the supplier may not supplythe material in the future.

Cash conversion cycle:-

Overall cash conversion cycle has improved from 108 (2002) to 94 (2002), but it again shows the poor performance of the company when compared to industry average of 77 days.

Fixed asset and total asset turnover ratio:-

Again these ratios show the decreased performance when compared to industry averages. These ratios show how efficiently the company is developing its assets to generate revenues.

Debt ratio and cost of borrowing:-

Debt ratio shows that how much debt is injected in the total capital. The ration gas increased from the 33% (2001) to 62% (2003) indicates that the company is relying on debt rather than the equity. The industry average debt ratio is 40%,however, the borrowing ratio has also increased. This indicates that the company is bearing high cost of acquiring funds.

Time’s interest earned:-

The current time interest earned is 1.03, which shows that the company pays only one-time interest from its profits. The performance seems to be poor when comparedwith the industry average of the 8 times.

Profitability ratios (gross profit, operating profit, net profit):-

After looking at the ratios, the performance seems to be poor when comparing with the industry average. This indicates that the company is unable to manage its cost in relation to revenues. The increased cost may be due to installing the new plant in this years, these are the one-time cost, which may reduce in future periods.......................

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