Current ratio Gross profit ratio Net profit margin ratio Inventory turnover ratio Days in inventory
Gentry Electronics has enjoyed tremendous sales growth during the last 10 years, however, even though sales have steadily increased, the company’s CEO, Erica Harding, is concerned about certain aspects of its performance. She has called a meeting with the corporate controller and the vice presidents of finance, operations, sales, and marketing to discuss the company’s performance. Erica begins the meeting by making the following observations:
We have been forced to take significant write –down on inventory during each of the last three years because of obsolescence. In addition, inventory storage costs have soared. We rent four additional warehouses to store our increasingly diverse inventory. Five years ago, inventory represented only 20% of the value of our total assets. It now exceeds 35%. Yet, even with all this inventory, “stockouts” (measured by complaints by customers that the desired product is not available) have increased by 40% during the last three years. And worse yet, it seems that we constantly must discount merchandise that we have too much of. “We have to employ one of these fresh finance graduates to enable us manage this problem. All I want is determine a way to make our problems less obvious and ensure the bank does not call back its loans. As it stands now, we seem to be heading towards losses and I am not willing to report a loss in any circumstance. We must manage our situation and avoid attention of the board and financiers. We have to be proactive and ensure finance will never be a problem in expanding our business.
Jeff who is a manager shares Erica’s concerns and how it will affect their strategic positioning. The business planned to extend their operations to three countries in the next two years and make public offering of their shares. He is worried that this current problem will affect their ability to attract investors and build an international business. To alleviate his fears, Jeff has advised the board of directors to invite investors and fund provider to boost their financial position before the IPO. He has also recommended that the company proactively start trading in foreign currency to build a currency base for the planned international expansion even though they are not sure when that will materialise and not authorised to trade foreign currency. “It does not matter when we expand or if we ever do. All we need to do is to make our shareholder believe we are expanding, and the foreign exchange trade and inflow will convince them. The key thing is for us to attract investors and raise our capital base, even though I don’t know how we will do that”.
Erica’s suggestion has been accepted and you have been employed as chief finance officer in Gentry Electronics. You have now been tasked to use the following financial data in evaluating the current situation with the company and make suggestions on the organisational strategies which will enable the creation and maintenance of value for Gentry. Your response should be presented in the form of a report covering the five questions below as sections of the report.
|Work in progress||116||77||49||33|
|Cost of goods sold||6,328||5,474||4,445||3,557|
- Compute the current ratio, gross profit ratio, net profit margin ratio, inventory turnover ratio and days in inventory for the four years. (30marks)
- From the ratios calculated in (a) above, is there justification for Erica’s concerns? Discuss the problems, implications, and potential causes of the changes in the ratios over the four years.
- As the newly employed chief finance officer in Gentry Electronics, discuss potential remedies to problems discussed in (b) above and how each suggestion will alleviate Erica’s fears or improve the performance of the company.
- Discuss two possible concerns Erica Harding and the management of Gentry Electronics will possibly raise regarding your suggestions in (c) above and offer two alternative sources of finance for Gentry?
- Discuss two financial and operating risks Gentry may face if all suggestions provided by Erica and Jeff are adopted. Are there possible corporate governance and ethical issues which might arise in relation to ideas presented by Erica and Jeff.
Note: Please keep your ratio calculations as an appendix to the report. Use only the information in the main report