DIABLESA (A) Harvard Case Solution & Analysis

Q1: Prepare an economic and financial analysis of the company.

Analysis of the financial position of Diablesa reveals that they have a deep prospect of the future growth level because their forecasted profit and loss statement predicts that remarkable growth potentials will enable Diablesa to generate more profits and hence more cash flows to finance the interest payments and the final repayment of principal amount. Further analysis of the budget regarding the general expenses over the next three years reveals that Diablesa has been successful in controlling the general expenses which would help achieve higher levels of revenues. On the other hand the ratio analysis of the Diablesa has also been prepared in order to assess the financial position of Diablesa and the current ratio of 1.47 shows that Diablesa has Peso 1.47 to pay each peso of its current liability. However, this ratio is quite positive and shows that the Diablesa is not in liquidity crises. Further the current net worth liabilities represent the 72% of total equity, which means that Diablesa is currently financing its current assets by a greater amount of current liabilities and the same results are being shown by the total liability to the net equity value. Further, the receivable collection period is about 29 days during the year 1992 which is a good sign of credit management by Diablesa because the short credit period is being allowed to the customer, hence, the early collection of trade receivables would reduce the working capital requirements.

Additionally, the accounts payable as a percentage of the cost of goods sold is only 5%, which means that Diablesa is not effectively financing its working capital from the trade payables which is an interest free credit available to it. Meanwhile, the profitability ratios have also been produced in order to assess the financial performance of Diablesa and the gross profit margins are 18% during the year 1992 and this margin has been maintained during the next seven month results which shows that Diablesa has effectively controlled the cost inventories through effective inventory management systems. Meanwhile, the operating profit margins were 5% during the year 1992 and these margins have increased to 7%, hence, this growth in operating profit margins is a result of effective management of operating cost. In addition to this, the operating environment, economic and market conditions are also in favor of Diablesa because the growth in the market has led it to acquire more capacity that would meet the growing market needs, hence, Diablesa is looking to expand the refrigerating facility in order to provide the distribution service to the two new products expected to be launched by Nestle. Therefore, the analysis of financial performance, the economic and market condition shows that Diablesa is good company with strong financial and liquidity position.

For the purpose of financial evaluation of Diablesa, cash flow statement has also been produced using the projected profit and loss statement. An evaluation of cash flow statement shows that as a result of financing the expansion in cooling rooms, Diablesa operations has started generating higher cash flows in comparison to the previous performance. During the first financial year after the financing, Diablesa has generated positive cash flows of pesos 41.37 million in comparison to the previous year’s cash flows of pesos 6.41 million. Meanwhile, after three years of operations Diablesa would be able to generate cash flows of pesos 106.91 million, which will be high enough to not only finance the interest payments and principal repayments, but it will also enable Diablesa to finance the future expansions through internally generated cash flows.

Q2: In your opinion, what is the sufficient amount of money that Ollero should ask the saving bank?

Currently, the working capital of Diablesa of finance, through the currently borrowed loan of 23 million pesos that it has used in order to finance the acquitting of market growth resulting growth in working capital requirements. However, since that is about to be matured and after the maturity of this long term loan, once againDiablesa would be needing to raise the amount of pesos 15 million from the Savings Banks before the maturity of current outstanding long term debt of pesos 23 million. However, a portion of the short term loan has been repaid during the year 1982, hence; balance still payable is 23 million. Therefore, Diablesa needs to repay outstanding balances of 23 million, meanwhile, the refinancing being sought from Savings Bank is about 15 million pesos which effectively leave the 8 million pesos still payable by Diablesa and if at the time of repayment of this balancing amount of 8 million pesos Diablesa fails to repay the amount then it will have to face the severe results.

Therefore, Ollero should approach the Saving Bank to secure an amount that will compensate the balance left by 15...................

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