Astral Records Ltd.

, North America Case Study Analysis & Solution

Astral CD Company Analysis

(2012-09-11 23:40:52)

标签：

杂谈

This is not an article but more an assignment. I just want to post it here for later review.

Company internal analysis

From the income statement in Exhibit 1, people can see a steady growth tendency of the company's
sale from 1990 to 1993, but what really should draw our attention is that net incomes in these four
years did not show us a responsive and correlated increase, instead of which a mild decrease took
place. Of course, the cost associated with selling process will increase when the sale goes up,
cancelling out part of the revenue. Nevertheless, if the operating growth margin is lower when sale
is, however, higher, we know that the operating expense has increased unproportionally while sale
increases. For instance, the sale in 1991 is 28,822 and the sale in 1992 is 34,010. Weird as it is,
compared with the operating margin in 1992, 6,476, that in 1991 reaches 7,109. Paying a closer look,
we will find that with a sale increase as 18%, the production cost and expenses increased 33.3%. The
problem is either the large scale production does not bring a better efficiency for the company or
the manufacturing cost in 1992 increased substantially due to the cost increase of certain raw
material, say plastic. Purely observing from the income statement, even if there is problem as I
identified above, the company is still in an acceptable operating condition. It had enough net
income to pay out dividends annually from 1990 to 1993 and reserved part of it as retained
earnings. People may be worried that because the company probably has no better project or area
to invest , it continuously pays out its disposable income as dividends, indicating a lack of future
growth momentum.

Combining the income statement and the balance sheet, we can calculate different ratios, which
helps to explain the financial or operational situation in specific areas. Below is a table for
profitability ratios quoted from the Exhibit 3. Taking this part out, I want to carefully examine why
the profitability of the company is continuously decreasing with time.

Years 1990 1991 1992 1993

Operating Profit Margin 23.4% 24.7% 19.0% 17.1%

Average Tax Rate 44.3% 40.3% 39.5% 39.0%

Return on Sales 7.9% 9.5% 5.7% 5.5%

 Return on Equity 18.3% 20.9% 13.9% 14.5%

Return on Assets 4.4% 5.4% 3.4% 3.3%

I would like to take ROE as an example here because it can be broken down into different pieces and
help to explain performances of different areas.

Return on Equity = Debt Burden* Financial Leverage*Asset Turnover*Operational Profit Margin

During this 4-year period, return on equity is decreasing, especially in 1992.

1990 1991 1992 1993

Return on equity 18.3% 20.9% 13.9% 14.5%

Debt burden 0.46015573 0.518444 0.373109 0.405169

Leverage ratio 4.145 3.841 4.146 4.35

Asset turnover 55.9% 57.5% 58.7% 60.3%

Operating profit margin 23.4% 24.7% 19.0% 17.1%

From this chart, we can easily distinguish that debt burden and operating profit margin are the two
items that are responsible for the dramatic decrease of ROE in 1992. The decrease of operating
profit margin has actually already been identified previously in the income statement analysis. Here,
again, the point is proved. The debt burden ratio measures the cost of serving debt, indicating the
degree of interest involved in debt borrowing transactions. From the equation of debt burden:
NI/(NI+I), a relation that can be easily recognized is the smaller the ratio is, the bigger the debt
burden is. The total liabilities increased by approximately 7,000, which is almost a 20 percent surge.
Some other reasons may also aggravate this problem, such as the increase of interest rate. When
the company increases its debt, investors want to know whether the company is liquid in the short
term and solvent in the long run. Here is the table for current ratio and acid test ratio from Exhibit 3
as below.

Years 1990 1991 1992 1993

Current Ratio 1.01 1.05 1.14 1.21

Quick Ratio 0.39 0.41 0.39 0.36

From the current ratio, we can find that the current assets are just about enough to cover the
current liabilities. Taking from this statistics, if everything goes just fine, the company should have no
big problem dealing with its short-run liabilities. Nonetheless, the acid test ratio, or quick ratio,
presents a quite different view. Quick ratio excludes inventory, which is often regarded as less liquid
in current assets category, and shows a series of relatively low values, values lower than 50%. In this
case, if inventories cannot be liquidated fast enough, the company will run short of cash, resulting in
default in debt payment. From the solvency perspective, the Debt/ Assets ratio shows that the
company is definitely solvent in the long run because the debt only occupies around 50 percent of
total assets.

Of course, here I can calculate all the turnover ratios including asset turnovers, accounts receivable
turnover, accounts payable ratios, and inventory turnovers, or even calculate the cash conversion
cycle, but because there are no comparison I can make with the sectors and industry. So, it is hard to
draw any conclusion by simply using the data in this case. So, I cannot dig out any valuable
information in the turnover parts. Even if I cannot compare it with other companies, the turnover
ratios indicate a quite stable efficiency of the company's operating process.

Industrial Analysis

There are couple companies are highly competitive in the CD industry and are named in the case
reading.

First of all, the Dickenson. Inc, having a long history in the market, just entered the CD
manufacturing field, and the revenue resulted from CD selling occupies only 20 percent of its annual
sales. So, Dickenson will not devote a large percentage of its energy competing with Astral. In
addition, Dickenson's P/E ratio, 9, is relatively low in the industry, and its Beta, a measure of risk is
higher than most of other companies in the same area. So, I do not think Dickson will bring a large
pressure on Astral in the short run in terms of competition.

Harris Beshel's stock is rated as AA level and the company itself is highly specialized in CD industry.
While the low P/E ratio, 8 in this case, and low growth rate, 6%,makes it less attractive to investors.
Even worse, a recent sharp decline causes investors to doubt on the company's future development,
lowering their expectation of its performance. So, Harris Beshel also are not very competitive.

Donaldson Inc, just established company, is gaining its market share very rapidly. Its sale is about of
the same amount of that of Astral. The company has good P/E ratio, 12, low beta, 1.2, and a rate
level as AA. A lot of investors will be convinced that Donaldson has a great potential to grow even
bigger. It is a strong competitor against Astral.

IBBEX Corp. enjoys an extraordinarily high P/E, 16 and annual growth rate, 10%. However, only 40
percent of its sale coming from selling CDs and its rating is not very good, Baa. Probably many
investors will be willing to invest because of its astonishing high return. So, it can also be competitive
to some extent.
Last, ZEPORT has a very high risk, 1.6 and a low rating as B. Its P/E ratio and annual growth rate are
apparently not high enough to justify its high risk. Moreover, the company's focus has partially
shifted from CD industry to other areas. So, this company won't be very competitive in the near
future.

After analyzing all these companies, we see that the CD industry is actually a very diversified
industry. It has low entries for companies to start from scratch and also low barrier to exit.
Competition within such market is often high and companies have to continuously diversify their
goods and services to attract customers, and this is probably what Astral has to do in terms of
maintaining its competitiveness.

Material quoted from the case study done by University of Virginia, Astral Records Ltd., North
America: Some Financial Concerns

Astral CD Company Analysis

(2012-09-11 23:40:52)
标签：
杂谈
This is not an article but more an assignment. I just want to post it here for later
review.

Company internal analysis

From the income statement in Exhibit 1, people can see a steady growth tendency of
the company's sale from 1990 to 1993, but what really should draw our attention is
that net incomes in these four years did not show us a responsive and correlated
increase, instead of which a mild decrease took place. Of course, the cost associated
with selling process will increase when the sale goes up, cancelling out part of the
revenue. Nevertheless, if the operating growth margin is lower when sale is, however,
higher, we know that the operating expense has increased unproportionally while sale
increases. For instance, the sale in 1991 is 28,822 and the sale in 1992 is 34,010.
Weird as it is, compared with the operating margin in 1992, 6,476, that in 1991
reaches 7,109. Paying a closer look, we will find that with a sale increase as 18%,
the production cost and expenses increased 33.3%. The problem is either the large
scale production does not bring a better efficiency for the company or the
manufacturing cost in 1992 increased substantially due to the cost increase of
certain raw material, say plastic. Purely observing from the income statement, even
if there is problem as I identified above, the company is still in an acceptable
operating condition. It had enough net income to pay out dividends annually from
1990 to 1993 and reserved part of it as retained earnings. People may be worried
that because the company probably has no better project or area to invest , it
continuously pays out its disposable income as dividends, indicating a lack of future
growth momentum.

Combining the income statement and the balance sheet, we can calculate different
ratios, which helps to explain the financial or operational situation in specific
areas. Below is a table for profitability ratios quoted from the Exhibit 3. Taking
this part out, I want to carefully examine why the profitability of the company is
continuously decreasing with time.

Years 1990 1991 1992 1993

Operating Profit Margin 23.4% 24.7% 19.0% 17.1%
Average Tax Rate 44.3% 40.3% 39.5% 39.0%
Return on Sales 7.9% 9.5% 5.7% 5.5%
Return on Equity 18.3% 20.9% 13.9% 14.5%
Return on Assets 4.4% 5.4% 3.4% 3.3%

I would like to take ROE as an example here because it can be broken down into
different pieces and help to explain performances of different areas.
Return on Equity = Debt Burden* Financial Leverage*Asset Turnover*Operational Profit
Margin
During this 4-year period, return on equity is decreasing, especially in 1992.

1990 1991 1992 1993

Return on equity 18.3% 20.9% 13.9% 14.5%
Debt burden 0.46015573 0.518444 0.373109 0.405169
Leverage ratio 4.145 3.841 4.146 4.35
Asset turnover 55.9% 57.5% 58.7% 60.3%
Operating profit margin 23.4% 24.7% 19.0% 17.1%

From this chart, we can easily distinguish that debt burden and operating profit
margin are the two items that are responsible for the dramatic decrease of ROE in
1992. The decrease of operating profit margin has actually already been identified
previously in the income statement analysis. Here, again, the point is proved. The
debt burden ratio measures the cost of serving debt, indicating the degree of
interest involved in debt borrowing transactions. From the equation of debt burden:
NI/(NI+I), a relation that can be easily recognized is the smaller the ratio is, the
bigger the debt burden is. The total liabilities increased by approximately 7,000,
which is almost a 20 percent surge. Some other reasons may also aggravate this
problem, such as the increase of interest rate. When the company increases its debt,
investors want to know whether the company is liquid in the short term and solvent in
the long run. Here is the table for current ratio and acid test ratio from Exhibit 3
as below.

Years 1990 1991 1992 1993

Current Ratio 1.01 1.05 1.14 1.21
Quick Ratio 0.39 0.41 0.39 0.36

From the current ratio, we can find that the current assets are just about enough to
cover the current liabilities. Taking from this statistics, if everything goes just
fine, the company should have no big problem dealing with its short-run liabilities.
Nonetheless, the acid test ratio, or quick ratio, presents a quite different view.
Quick ratio excludes inventory, which is often regarded as less liquid in current
assets category, and shows a series of relatively low values, values lower than 50%.
In this case, if inventories cannot be liquidated fast enough, the company will run
short of cash, resulting in default in debt payment. From the solvency perspective,
the Debt/ Assets ratio shows that the company is definitely solvent in the long run
because the debt only occupies around 50 percent of total assets.

Of course, here I can calculate all the turnover ratios including asset turnovers,
accounts receivable turnover, accounts payable ratios, and inventory turnovers, or
even calculate the cash conversion cycle, but because there are no comparison I can
make with the sectors and industry. So, it is hard to draw any conclusion by simply
using the data in this case. So, I cannot dig out any valuable information in the
turnover parts. Even if I cannot compare it with other companies, the turnover ratios
indicate a quite stable efficiency of the company's operating process.

Industrial Analysis

There are couple companies are highly competitive in the CD industry and are named in
the case reading.

First of all, the Dickenson. Inc, having a long history in the market, just entered
the CD manufacturing field, and the revenue resulted from CD selling occupies only 20
percent of its annual sales. So, Dickenson will not devote a large percentage of its
energy competing with Astral. In addition, Dickenson's P/E ratio, 9, is relatively
low in the industry, and its Beta, a measure of risk is higher than most of other
companies in the same area. So, I do not think Dickson will bring a large pressure on
Astral in the short run in terms of competition.
Harris Beshel's stock is rated as AA level and the company itself is highly
specialized in CD industry. While the low P/E ratio, 8 in this case, and low growth
rate, 6%,makes it less attractive to investors. Even worse, a recent sharp decline
causes investors to doubt on the company's future development, lowering their
expectation of its performance. So, Harris Beshel also are not very competitive.

Donaldson Inc, just established company, is gaining its market share very rapidly.
Its sale is about of the same amount of that of Astral. The company has good P/E
ratio, 12, low beta, 1.2, and a rate level as AA. A lot of investors will be
convinced that Donaldson has a great potential to grow even bigger. It is a strong
competitor against Astral.

IBBEX Corp. enjoys an extraordinarily high P/E, 16 and annual growth rate, 10%.
However, only 40 percent of its sale coming from selling CDs and its rating is not
very good, Baa. Probably many investors will be willing to invest because of its
astonishing high return. So, it can also be competitive to some extent.

Last, ZEPORT has a very high risk, 1.6 and a low rating as B. Its P/E ratio and
annual growth rate are apparently not high enough to justify its high
risk. Moreover, the company's focus has partially shifted from CD industry to other
areas. So, this company won't be very competitive in the near future.

After analyzing all these companies, we see that the CD industry is actually a very
diversified industry. It has low entries for companies to start from scratch and also
low barrier to exit. Competition within such market is often high and companies have
to continuously diversify their goods and services to attract customers, and this is
probably what Astral has to do in terms of maintaining its competitiveness.

Material quoted from the case study done by University of Virginia, Astral Records
Ltd., North America: Some Financial Concerns