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have without this outside financing.

If this financing were to increase

p r o f i t s b y a n amount greater than the cost of the debt, then shareholders receive more
earnings.Looking at Kota Fibres Times interest earned ratio, which measures the firm's ability
tomake contractual interest payments, they are within an acceptable range in 2000
(8.57)and 2001 (5.60). With the projection in 2001, there is a lower ratio which means they
willdecrease their ability to fulfill interest obligations if the pursue their forecast.Profitability
Ratios:These ratios enable analysts to evaluate a firms profits with respect to a
given level of s a l e s , a c e r t a i n l e v e l o f a s s e t s , o r t h e o w n e r s i n v e s t m e n t s . I t
i s c o m m o n l y u s e d t o compare performance across years. The higher the Gross
Profit Margin, the better; thelower the relative costs of merchandise sold. In this
case, Kota Fibres has an expected Gross Profit Margin ratio of 16% in 2000 and an actual
ratio of 13% in 2001. This showsthat they have a fairly week profit-to-sales ratio heading into the
projected year. This alsoreflects a change in their pricing strategy and its ability to control
operating costs. Theyw i l l n e e d t o i m p r o v e t h e i r a b i l i t y t o m a n a g e t h e i r
o p e r a t i n g c o s t s i f t h e y p l a n o n increasing their bottom line.T h e R e t u r n o n
assets ratio, often referred to as ROI, is used to measure the
o v e r a l l effectiveness of management in generating profits with its available resources. The
higher the firms ROI: the better. Kota Fibres will see a reduction of 13% if they
proceed withtheir 2001 projection. This is a significant indication that they will not
be using their available resources as effectively as they are in 2000. In 2000, the
firm has a ratio of 44%; expecting only 31% in 2001. This means that the firm
earned $0.44 cents on eachdollar of asset investment in 2000. The projection shows a
problem in resource efficiency.Looking at the Return on Equity ratio, Kota Fibres has recorded
49% in 2000 and 43% inthe 2001 projection. This ratio measures the return earned on the
common stockholdersi n v e s t m e n t i n t h e f i r m . T h e h i g h e r t h e r e t u r n , t h e m o r e
p r o f i t s a r e d i s t r i b u t e d t o t h e owners. In this case, following the projection there
will be a 6% reduction in ROE. Thegoal of a business is to keep the shareholders happy
with their distributionsdecreasingthem by 6% can cause investors to refrain from lending to
the firm if they cannot increasethe ROE year-to-year. This can be directly tied to the slight
reduction in Asset Turnover and in ROI.
Currently, there are about 200 mills that manufacture blended and synthetic yarn. India isthe
worlds third-largest producer of cotton and second-largest producer of cotton yarnsa n d
textiles. The textile industry itself had been governed mainly by the
MultiFibreArrangement until 2005. This initially put restraints on
s h i p m e n t s f r o m e x p o r t e r s , reducing both production and exportation from countries such
as India. In 1995, the MFAquotas were eliminated and textile production and trade
became accelerated again for India (Landes, pg 2).
This past July, the industry hit rock bottom with raw material prices higher than ever andthe
verge of closure of many companies. The blended yarn spinners have been put at
agreat disadvantage as China is able to supply polyester staple fibre at a much
cheaper price. At this time, the President of the Indian Spinners Association asked
that importduties were abolished and a reduction of excise duties on all man-made
fibres from 8%down to 4% to save the blended yarn spinning industry. Regardless

of this cut, taxationwill still remain high among the saris and synthetic fibre yarn.As a typical
woman purchases three saris a year, this could easily change with a raise in price. Most
Indians are extremely price sensitive and allot 55% of their income to gospecifically
towards food. In the past, they have spent 17% of their income on saris. As s a r i s a r e
a tradition, the amount spent and number purchased per year may
f l u c t u a t e based on income and price per sari.Originally, the textile industry had hoped
to create an additional 17.4 million jobs by2012 yet as costs have dramatically
increased, keeping the number of existing jobs will be a challenge. Mr. Ladia, the
President of American Spinners Association, also explainedthat the top five in the textile industry
reported a decline in profits of anywhere from 80to 99% in 2007-2008 (Seihk). Most
companies continue to remain small in size so theyarent required to adhere to wage
or employment security regulations. Employing more than ten people would mean a wage
increase of 50-60% for an employee. Similar to KotaFibres, layoffs in the off-season were a
yearly event.As Kota Fibres is non-existent in the titles of nylon Fibre production facilities, it is
clear t h a t t h e y w e r e n o t a b l e t o s u r v i v e t h e h i t t h e i n d u s t r y r e c e n t l y
u n d e r w e n t . P o s s i b l y declaring bankruptcy, the company should re-evaluate where
they went wrong if thefamily wants to consider going back into business. The evaluations
below will shift KotaF i b r e s , L t d . b a c k i n t o t h e m a r k e t a n d i n t o a
competitive, profitable position.
M s . P u n d i r i s f a c e d w i t h r e s o l v i n g a s u r p r i s i n g c a s h s h o r t a g e i m m e d i a t e l y.
A s h e r management style is extremely delegative, it is important that she analyzes Kota
Fibresfinancial situation before making any decisions. With success in the company for the
pastf o r t y y e a r s , M s . P u n d i r w e i g h s h e r f o c u s o n s h a r e h o l d e r p r o f i t s m o r e
s o t h a n t h e c o m p a n y s l i q u i d i t y a n d f o r e c a s t f o r t h e f u t u r e . T h e f o l l o w i n g
r e c o m m e n d a t i o n s regarding the financial situation the company currently stands in as well as
advice on thememos are discussed below:Overall, Kota Fibres, Ltd. is doing a good job at
managing their liquidity, although the projection does show a slight decline in this
area. This means they could have potential issues with paying their bills on time and
converting their assets to cash if they follow the2001 projection.In the area of Asset turnover
and AR/AP, Kota Fibre is operating at an acceptable level a c r o s s t h e b o a r d .
H o w e v e r , o n e r e d - f l a g i s t h e e x t e n d e d c r e d i t t e r m o f 8 0 d a ys n e t
requested by Ponticherry Textiles. This would reduce the amount of cash on hand duringthe year
and increase their liabilities due to the 80 day credit term. In this circumstance,Kota Fibres
should not accept this memo as it will have an unfavorable effect on the business.
Having less cash on hand, tied up in receivables, will not allow Kota Fibres to be
able to pay off the All-India bank before December.In addition, the two proposals from the
Transportation Manager and the Purchasing Agentshould be approved. A reduction in raw
material inventory and finished goods inventoryon hand will result in less inventory being
accounted for in the financial statements andincrease the amount of overall liquidity since
Inventory is the least liquid asset.Kota Fibres must also recognize the contributing factor
of the shortage of cash on hand.This is due to the firms inefficiency to use their
assets to generate sales. Kota Fibres should boost this number by increasing their amount of
total assets. Their Debt-to-equitystanding reflects another sign of how they can increase their
cash on hand. The projectionfor 2001 addresses this area well, and should be pursued.Kota Fibre

will need to rethink its strategy to generate a profit using the 2001 projection.Across the board,
they will be facing a decrease in profitability if they execute this plan.T h e y w i l l n e e d t o
i m p r o v e t h e i r o p e r a t i n g e f f i c i e n c i e s a n d l e v e l s o f i n d e b t e d n e s s t o increase
their bottom line, ultimately resulting in their ability to make their creditors andshareholders
happy. It is crucial that shareholders are informed on the recommended actions. This
may allow for a different approach to business rather than Ms. Pundirs soleo b j e c t i v e o f
maximizing shareholder wealth. Understanding the seriousness of
t h e financial situation Kota Fibres is in with regards to paying their bills on time and
futureforecasts, ethics and responsibility may also come forward as shareholders
should bew i l l i n g t o r e i n v e s t p r o f i t s i n a c o m p a n y t h a t w i l l b e n e f i t
them in the long run.
B r u n e r, R o b e r t F. ( 2 0 0 7 ) . C a s e S t u d i e s i n F i n a n c e : M a n a g i n g f o r
C o r p o r a t e Val u e C
Maurice. MacDonald, Stephen. Singh, Santosh. Vollrath, Thomas.
U n i t e d S t a t e s
D e p a r t m e n t o f A g r i c u l t u r e 0 1 0 6 2 0 0 5 .
0 3 0 4 2 0 0 9 . <
df>.Seikh, Abu. "Blended yarn industry calls for immediate relief." Meri News
18072008. .03042009<


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