Caltron Limited Harvard Case Solution & Analysis

Caltron Limited Case Study Solution

Introduction:

Caltron Limited was formed in 1971 by an enthusiastic entrepreneur Jenny Jones, the primary business activity of the company was the manufacturing of electronic calculators. In the initial days, the business proved to be very successful and during the phase of rapid expansion, competition, mergers and acquisition, Caltron limited was one of the fewest companies which survived profitably without merging with another company.

The main reason of this isolation was the emotional attachment of the founder of Caltron Limited, the original CEO and Chairman was so attached with the company that he appointed his successor from the family. Majority of the directors were not happy by the decision to appoint Kyla Jones as the president of the company because of her lack of experience. The concerns of the directors proved to be right and the performance of the company started to deteriorate at a greater rate under the leadership of Kyla Jones.

As the performance of Caltron Limited was deteriorating, the performance of almost all the main competitors was improving, the main reason for this under performance of Caltron Limited was the location of the production plant. Apart from the operational inefficiencies, the financial performance of the company was also very poor with majority of the ratios were very lower as compare to the industry averages.

Problem Statement:

The performance of the main competitors was improving day by day while the performance of Caltron was decreasing drastically, it can be said that this was the biggest challenge and problems pertaining in the operational aspects of the company. Nowadays almost all the manufacturers of specialist components and machines are relocating their production plants to developing countries in order to take benefit from the lower labor and overhead costs. On the other hand, the management of Caltron is not considering the relocation option which is costing more to the organization.

Financial Analysis:

Liquidity Ratios:

The liquidity position of the Caltron Limited appears to be worst, all the liquidity ratios except from the quick ratios are very low as compared to the industry averages and benchmark threshold. The benchmark for the current and quick ratios for any industry are 2:1 and 1:1 respectively, both these ratios of Caltron Limited are below than the pre-described threshold which seems to be very dangerous for the company. It can be said that Caltron Limited will find it very difficult to settle its current liabilities from its current assets. Caltron Limited would have to rely on bank overdraft in order to pay-off its current liabilities which ultimately reduces the profitability of the company.

Furthermore, the cash ratio is very poor which can be the alarming situation for the company. The management might face severe difficulties in paying the salaries and creditors, this inability to settle the liabilities on time can damage the relationship of the company with suppliers and employees, this can have very adverse consequences for the company especially in the anticipated poor economic condition. Given the several covenants being placed by the bank the intensity and consequences of these poor ratios can increase drastically.

Profitability Ratios:

The profitability position of Caltron also appears to be very poor, all the profitability ratios are very low as compared to the industry averages. Another factor which also needs to be considered is that all the profitability ratios were good to some extent in the year 2001 but all these ratios became very poor in the subsequent years and it is also expected that these ratios will also be reduced in the next years because of the high likelihood of the recession. All these poor profitability is due to the poor policies of the management because of the fact that the industry have these ratios higher. The net profit margin and operating profit margin are particularly indicating the very poor performance of the company against the industry averages. Further decrease in the profit and increase in the expenses can have very negative implications for the company.

On the other hand the fixed asset turnover and total asset turnover is very high which can be solely due to the excessive investment of Kyla Jones in the non-current assets. Although the turnover on fixed assets and total assets is very high but these assets are failing to generate the profits, the lower return on assets ratio is the most effective proof of this fact....................

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