Strong-Tie LTD Case Study Help
The cash conversion cycle of below industry average suggests that Strong tie ltd is solvent, takes less time to generate cash as the organization takes significantly less tie to convert its inventory into sales as compared to other players in the industry. This suggests that the organization manages its inventory efficiently.
Figure 1: Ratio Analysis
| Ratio Analysis | |||||
| Years | 2006 | 2007 | 2008 | Industry average | 3 years average |
| Short term liquidity: | |||||
| Current Ratio | 5.01 | 4.29 | 4.29 | 4 | 4.53 |
| Cash ratio | 2.19 | 2.07 | 1.56 | 0.5 | 1.94 |
| Solvency: | |||||
| Debt to equity ratio | 32% | 33% | 38% | 35% | 34% |
| Interest cover | 9.46 | 5.68 | 1.02 | 2 | |
| Operating efficiency: | |||||
| Gross Profit Margin: | 36% | 31% | 28% | 32% | 32% |
| Operating profit margin | 14% | 9% | 3% | 16% | 9% |
| Net profit margin | 9% | 5% | 0.042% | 10% | 5% |
| ROA | 13% | 8% | 0.056% | 17% | 7% |
| ROE | 22% | 13% | 0.105% | 28% | 12% |
| Cash conversion cycle: | |||||
| Raw Materials Turnover in Days | 35.8 | 41.2 | 42.6 | 31 days | 39.9 |
| Work in progress Turnover | 7.0 | 4.2 | 1.3 | 3 days | 4.2 |
| Finished Goods Turnover in Days | 71 | 52 | 37 | 51 days | 53.2 |
| Accounts Receivable Turnover in Days | 73 | 72 | 63 | 63 days | 69.5 |
| Accounts Payable Turnover in Days | 19 | 17 | 15 | 11 days | 16.8 |
| Cash conversion cycle | 168.3 | 152.9 | 128.4 | 137 days | 149.9 |
Profitability and Sustainable Growth Model:
A profit model involves steps taken by the organization in order to ensure profitability and business viability. Therefore, the business is advised to employ a production profit model which involves emphasizing on the production and the operating business component. The production component will ensure high-quality services and products are offered to the customers which are manufactured at maximum capacity.
Furthermore, the production component will involve operating at the lowest possible cost by automating the production process as high production cost will make the products expensive for the customers to purchase and will reduce the market share of the organization further considering, the housing prices were at a peak in the year 2006.
The operating component of the profit model will involve using skilled and well-experienced employee which will work efficiently, ensure that the production equipment operates at optimal levels and are upgraded. Furthermore, the profit model of the organization will involve ensuring operational efficiency by employing automated manufacturing processes, cutting the selling and administrative spending,salary paid to the daughters, dividend paid to Katherine, the founder’ sister and hedging the risk associated with the rising metal prices by entering into forwarding contracts.
Recommendation:
In order to ensure the financial viability and sustainability of the business, it will be advised to the business to reduce the cost associated with the health care and pension benefits of the employees in order to reduce operational costs. Furthermore, it will be advised to the business to reduce the selling and administrative spending which includes the salary paid to the daughters in order to increase the net profit margins, return on assets and return on equity.
Moreover, it will be advised to the business to fix the finished goods turnover days to 37 days in order to convert the inventory into sales faster as compared to other players in the industry. Furthermore, it will be advised to the business to reduce the raw material turnover days below industry average by using automated machinery and processes effectively.
The dividends amounting to 500,000 Canadian Dollars paid to the sister of the founder should be cut in order to retain the earnings for future investments in paying short term and long term obligations. The cash saved as a result of implementing a temporary cut in the daughter's salaries, employee costs and preferred dividends will be added back to the cash which will be utilized for paying expenditures and debts.
Additionally, it will be advised to the business to improve liquidity position by factoring the accounts receivable which will ensure that the organization receives immediate cash from sales as customers tend to pay more quickly to the factors. Employing the provided recommendations, the organization will be able to meet the terms outlined in the revolving credit agreement with the Bank of Nova Scotia and will resolve the bank’s concerns as the business’s profitability and liquidity position will be improved.
In addition, it will be advised to the business to hedge the risk associated with the increase in metal prices by entering into a forward contract which will allow the business to manage the cost of goods sold and continue offering services at the current price in order to create customer value. The organization already sells the products at premium prices as compared to other players therefore, it is advised not to increase the service charges...................................
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