A case study on
Presented By: Group 1 Abhijit Chakravarty Roll No. 12PGPWE001 Abhishek Agrawal Roll No.12PGPWE002 Abhishek Pruthi Roll No.12PGPWE003 Anu Ranjan Roll No.12PGPWE004 Anurag Rao Roll No.12PGPWE006 Anil Kumar Bhardwaj Roll No.12PGPWE005
Financial Ratios
Sales Outlook
Future Revenues
CASE SYNOPSIS
Butler Lumber Company A growing profitable business with projected substantial increase in its level of activities has exhausted its credit limit of $ 2,50,000/-. The company is now considering to go for enhancement in its credit facilities by raising its credit limit to $ 4,65,000/- by switching to another bank.
BACKGROUND
Butler Lumber Company
Incorporated with Mark Butler and Henry Stark as partners. Products included plywood, mouldings, sash and door products. Did business of retail distribution in local area. Mark Butler bought out Henry Starks share for $ 1,05,000/-, financed by loan of $ 70,000/- carrying interest of 11%, repayable in quarterly instalments of $ 7,000/- for next 10 years. Company was experiencing shortage of cash and wanted to increase borrowings which presently is $ 247,000 from Suburban Bank. Butler Contacts Northrop Bank which tentatively agrees to lend secured 90 day note not exceeding $ 465,000 at an interest of 10.5%.
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From Vendors 2% discounts if payment made within 10 days All accounts became due in 30 days During last two years, the company had not availed purchase discounts because of shortage of funds.
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OPERATING STATEMENTS
1988 1697 Op. Inventory Purchases 183 1278 1461 Clo. Inventory 239 1989 2013 239 1524 1763 326 1990 2694 326 2042 2368 418 1991 Q1 718 418 660 1078 556
Net Sales
CoGS
Total COGS
Gross Profit Operating Expenses PBIT Interest Expenses
1222
475 425 50 13
1437
576 515 61 20
1950
744 658 86 33
522
196 175 21 10
2589
1011 901 110 48
PBT
Prov. For Taxes PAT
37
6 31
41
7 34
53
9 44
11
2 9
62
8 11
51
Balance Sheet Cash AR Inventory Total CA FA Total Assets Notes Payable to Bank
1991(Proj)
55 424 559 1037 210 1247 403
105
0
0
0
0
0
0
157
0
0
Accounts Payable
Accrued Expenses
124
24
192
30
256
39
243
36
342
52
7
260 64 270 594
7
375 57 304 736
7
535 50 348 933
7
690 47 357 1094
7
804
9
43
400
1247
INVIGILATORS QUESTIONS
Why does Mr. Butler have to borrow so much money to support this profitable business? Do you agree with his estimate of the companys loan requirements? How much will be need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)? As Mr. Butlers financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butlers loan request, and, if so, what conditions would you put on the loan? 10
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FINANCIAL HIGHLIGHTS:
LIQUIDITY:
Cash has been decreasing from 1988 till 1990. However, it is projected to increase to $55K for FY 1991. Current ratio, quick ratio and cash ratio have been decreasing throughout the year (Indicating lower liquidity).
Average Collection Period Days during the last 3 years have remained around 36 days as against Average Payment Period Days of around 38 days. Days in inventory during the last 3 years have remained around 71 days. However, the same in projected to be around 68 days.
INVENTORY TURNOVER:
INTEREST PAYMENTS:
1990
44 44 88 7 17 24 64 180 73 107 -43 87 681
1991
52 52 104 7 53 60 44 253 99 154 -110 170 906
3 4 5 6 7 8
87 51 -10 128
92 95 -7 180
Profitability Ratios
Activity Ratios
Sales to Asset Ratio Receivables Turnover Inventory Turnover Ratio
Leverage Ratios Debt Ratio Times Interest Earned Ratio No of Days Payables
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PROFITABILITY RATIOS
50.000% 45.000% 40.000% 35.000% 30.000% GP RATIO NP MARGIN
27.991%
28.614%
25.000%
20.000% 15.000% 10.000% 5.000% 0.000% 2.539% 1988 2.683% 1989
27.617%
27.298%
2.858% 1990
2.646%
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1991Q1
ACTIVITY RATIOS
12 10 8 10.306 9.924 10.244 9.646
9.996 9.116
6 5.113
4 2.857 2 0 1988 1989 1990 1991Q1 3.027 3.228 5.087 5.242 4.287 2.834
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LEVERAGE RATIOS
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 0.395 0.192 1988 3.05 2.606 2.1 TIMES INT EAR DEBT RATIO INC ST DEBT RATIO 3.846
0.409 0.158
1989
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LIQUIDITY RATIOS
2 1.8 1.6 1.4 1.2 1.8 1.589 1.45 1.351 CR QR 0.72 0.669
1
0.8 0.6 0.4 0.2 0 1988 1989 1990 1991Q1
0.881 0.545
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SWOT ANALYSIS
Control over operating expenses Demand relatively protected from economic fluctuations Highly centralised model of management Poor Liquidity and efficiency ratios
Strength
Weakness
Threats
Conservative in operations
Opportunties
Positive image amongst its customers
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Shortage of Cash
Cash tied up with inventory Can be improved by working on receivables turnover ratio
Debt Consolidation
Expansion
Additional investments in working capital and inventories will be required to meet the sales volume
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Assuming 1991 sales volume of $3.6 million companys loan estimation is overstated Loan of $ 403,000 will be sufficient for sales volume
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BANKERS PERSPECTIVE
As
Bankers we would
not approve the loan of $465K, rather we would approve the loan of $403K. The same is based on the projections of 1991.
Conditions of Sanction: The Company will improve its Net Working Capital to Total Asset Ratio in addition to improving the Current, Quick and Cash Ratio by induction of fresh capital The Company will resort to better management of inventory, account receivable in order to ensure sufficient liquidity
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Thank You
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