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gemini electronics Case Solution


After completion of his Ph.D., Frank Wang set up hisbusiness of manufacturing electronics named Gemini Electronics in 2002. Mr. Wang always wanted to manufacture TV devices in America and reduce the dominance of Asian producer of TV devices such as Sony, LG, and Samsung. Mr. Wang worked with various high technology companies in his hometown before he formed his company.Initially, Gemini Electronics was involved in manufacturing LCDs, later they engaged in producing other products in theentertainment industry.

The company proved to be very successful in its early stages, and just after a span of three years, Gemini Electronic became the biggest producer of TVs in the United States with over 35% of the total market share of the TV manufacturing industry. The company was agreat source of concern among its various large competitors. The company always placed tight controls over its competitors and drove its future strategies after analyzing the future strategies of its rivals. Gemini Electronics has a history ofcontinuously developing its products..

The company is very aggressive aboutthe expansion of its business and is considering expanding through organic and inorganic growth. The management is diversifying the range of its products so that they can maximize their market share, on the other hand, they are also considering some other option such as acquiring companies operating in the industry as well as outside the industry to gain economies of scale. Its production facilities are aligning with the latest technologies which allow them to produce different kinds of entertainment electronicssuch as music system, TVs, and DVDs. Furthermore, the company has asignificant amount of reserves which might help them in acquiring new companies. In addition to this, the company also has astrategic alliance with various departmental stores and large retailers which are responsible for the sales of Gemini Electronics.

Problem Statement:

Gemini Electronics is considering acquiring companies to pursue diversity and to further increase its product range to its customers. To ensure long-term survival, it is crucial for Gemini Electronics to update its products and bring diversity into its operations continuously. But the only concern for Gemini Electronics is that the acquisition usually requires considerable financial resources, companies typically manage the acquisition through the issuance of debt and equity. In the case of Gemini Electronics, the company already has a large proportion of debt which can make it difficult for the company to raise further finance for acquisition.

Performance Evaluation:

Liquidity Ratios:

The Liquidity position of Gemini Electronics appears to be quite good, current ratio and quick ratio has increased from the years 2005 to 2009. The increase in the current and quick ratio indicates the sound performance of the enterprise, the growth in these ratios specify that the company can meet its current liabilities from its current assets. The ideal current and quick ratios are 2:1 and 1:1 respectively, the current and quick ratios of Gemini Electronics is above the ideal threshold which suggests that Gemini is performing way more than required.

Profitability Ratios:

The profitability position of Gemini is also satisfactory but, all the profitability ratios are declining which is analarming situation. The gross profit margin fell in 2009 which indicates that the cost of goods sold is increasing; on the other hand net profit margin has also dropped down from a little. However, the reduction in both the ratios can be justified due to the decrease in overall prices of TVs and other products and increase in the marketing expenses. R&D expenditure is also increasing drastically which is another reason for the decline in net profit margin. Additionally, due to the global recession, sales of Gemini Electronics havealso decreased and the inflation plays a significant role in this reduction as well because people now don’t spend much onentertainment electronics.A furtherreduction is also possible due to the continuation of economic crises.

Return on assets and return on equity is also decreasing, particularly return on investment has dropped drastically and Gemini Electronic has seen almost 50% reduction in return on equity from 2006 to 2009. The decreasein returnoninvestment suggests that the management is finding it difficult to deploy the shareholder’s principal; again the reason for this lessening is arise in the R&D expenditure and other variable expenses. By analyzing the financial statements and case study, it is assessed that the company is taking substantial debt which results in the increase in interest cost which is rising drastically.

Efficiency Ratios:

The efficiency ratios primarilyaccount receivable, accounts payable and inventory turnover days signify the liquidity position of the company. The accounts receivable turnover days of Gemini Electronics are decreasing which indicates that the credit control department of Gemini Electronic is performing well, on the other hand, the accounts payable turnover days are falling. This decrease might be of some benefit and some disadvantage for Gemini Electronics, by settling the suppliers early the company can get some early payment discounts and can get rid of delay penalties. Early payment to vendors often cause liquidity problems for the company and it might face difficulties in payment of other expenses such as salary payments to employees and rental and interest payments.Inventory turnover days are also decreasing but are still significant, excessive inventory turnover days might result in additional costs and risks, holding the inventory for an extendedperiodresults in the increase in holding costs and the risk of damage to stock is also high. Given the sensitive nature of the stock of Gemini Electronics, this risk appears to be quite high for Gemini..........................................

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