Strong Tie ... assignment 2 Case Solution
To: David Johnston
Subject: Assessment Financial Data & Evaluation
Through the Analysis of the financial statements of Strong Tie limited provided in the case. It can be evaluated that, despite implementing various automation within its operating structure, the company was facing tremendous issues. As it was engaged in, the manufacture and designing of standardized and custom structural connectors.To be used in the construction of houses, decks and fences, along with various others. Furthermore, it could be assessed that, the recent downwards trend of the house industries, had significantly harmed the profitability of the company over the years. Which would be further justified from the analysis conducted in the Exhibits illustrated below.
Therefore, according to the Ratio analysis conducted.It can be determined that, its cash ratios has significantly declined from 0.15 in 2006 to 0.03 in the year 2008, which was lower than the industrial average of 0.50. Which meant that, every year that passed from 2006 on ways the company decreased its ability to effectively pay off its debts or liabilities, attributed to its declining cash and cash equivalent. Furthermore, it can be evaluated that, although the company had been able to decrease its turnover ratio with respect to raw material, WIP, Finished goods, account receivable and account payable. But, despite this it had not been able to meet in industrial average in most of them. Where its raw material turnover in day, was significantly above the industrial average benchmark turnover days, along with it account payable turnover days. Which meant that, the company was inefficient in converting its raw material into finished good, incurring additional holding cost in terms of raw material storage. Whereas, it can be assessed that, with respect to its WIP turnover days, the company was able to meet and exceed the benchmark industrial average, along with its finished goods inventory turnover.Whereas, for its account receivable turnover in days, it was able to meet its industrial benchmark. Which meant that, the company was efficient in converting its finished good into sales and account payable in to cash, that would be used to fulfill the working capital requirement of the company. Moreover, it can be evaluated that, the company’s cash conversion cycle was lower than the industrial average, and its current ratios were below the benchmark of the industry and the benchmark set by the financing banks at 1.5. Which meant that, in the future the company could attain financing from banks to fulfill their working capital requirement, ensuring its long-term operations in the market.Additionally, the company long-term debt to total capitalization had increased over the years above the industrial benchmark, showing company’s increased long-term debt acquisition patterns.Whereas, its cash coverage was significantly below the industrial benchmark, compromise its ability to cover its increasing liability with its cash flows generated from operation in the market.On the other hand, it can be assessed that, the gross and net profit margins had continued to decline, while remaining below the industrial benchmark over the years.Showing signs of decrease demand or appeal of its products in the market by the customers. In addition to this, it can be evaluated that, the Return on assets and equity of the company, had significantly declined over the years and remained below the industrial benchmark. Which showed the declining performance of the company, in the market with respect of its relative stakeholder and shareholders.
Similarly, declining sales and profits from the year 2007 to 2008, can be seen from the common size income statement of the company. Whereas, from the common size balance sheet statement it can be assessed that, the cash and cash equivalent of the company had declined, along with its current assets. Therefore, it can be evaluated form the forecasted cash flows statement that, if the company continues on its path, then it could significantly decrease its cash flows and in turn, compromise its ability to generate profits in the future. Which could compromise its ability to ensure, its long-term survival in the highly diverse and competitive market.
Therefore, it can be recommended to Strong Tie and its management that, they should focus on outsourcing its operation to the developing economies of the world such as china. Which would allow the company to enhance its economies of scale, by taking advantage of cheap labor.In which, the outsourced organization operating in china could taking advantage of cheaper labor manufacture the same product, with the same quality cost effectively. Hence, it can be determined, by outsourcing its production function to china.The company would be able save the cost associated with producing the products locally, labor salary and benefits, automation costs and production facility rent or taxes and in turn, manufacture the same product at a much cheaper rate. Which in turn, would allow them to sell their products, at a market competitive or cheaper price.While gaining a competitive edge over its competitors available in the market, and enhance its products appeal among the customers. Which could ensure its long-term survival in the market, by ensuring its revenues generation capabilities in the future......................................................
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