Druthers Forming Limited Harvard Case Solution & Analysis

Problem Diagnosis

            The account manager of the Canadian Commercial Bank located at Barron, Ontario was reviewing the latest loan request that he has received from the Druthers Forming Limited. A loan for the amount of $ 350000 was being requested by the co-founders of the company. Druthers Forming Limited has been a long time customer of Canadian Commercial Bank and they had developed a long relationship with the bank. The purpose of the loan was to fund the construction of a new building that would fund the existing operations of the company. The construction of the building had already begun by the company. The company was however, operating without the line of credit and this was identified by the account manager. As a result of this he became more concerned that whether the company would be able to generate enough cash to pay the expenses and the loan payments as they will fall due. A time period of one week was left before a final decision regarding the credit was to be made and the account manager began to assess the performance of the company based on a range of metrics. He started to look at the cash flow statement, financial projects of the company and the ratio analysis of the company to assess its likely hood of repaying the prospective loan payments.

Analysis of the Loan Application

            There are many factors to assess that performance of the company. First of all the analysis of the ratios needs to be performed in order to justify the historical performance of Druthers Forming Limited.

Ratio Analysis& Sensitivity Analysis

            The most important ratios considering the short term survival of the company are the liquidity ratios. If we analyze the current and the quick ratio for the company then we can see that the current ratio for the year 2007 is 3.14. This is a very impressive ratio and it means that the company is managing its current assets very well. This means the company has 3 times the assets of the total current liabilities of the company and this would assure the bank manager that the company would be able to pay the loan payments in the future. Similarly, the acid test ratio for the year 2007 is 3.01 times. Again, we would reach the same conclusion that the liquidity position of the company is very strong. These figures suggest that the working capital management policies of the company are sound and stable.

            Moreover, we need to look at the working capital requirement of the company by performing a sensitivity analysis on the days in inventory, payables and receivables of the company. If we look at the working capital for the year 2007 then it could be seen that it has dropped drastically as compared to the previous years and this might show concerns over the health of the company. The age period for the accounts receivables, inventory and payables is 157, 12 and 57 days respectively. First if we look at the days sales in inventory then we can calculate the inventory turnover ratio for the year which is calculated to be 30.4 times. This means that the company would be selling its inventory 30.4 times in the whole year. This is a good ratio and this is also going to be seen as a positive sign by the bank as well.Druthers Forming Limited Case Solution

            Similarly, the receivables turnover could be calculated using days in receivables. This is calculated to be 2.32 times which means the company would receive its receivables 2.32 times each year. The pay ables turnover is 6.40 times each year. Therefore, we could see that the company is receiving its receivables much slower as compared to the payments that are being made by the company to its suppliers. This is not good at all and companies normally need to seek a balance between both the ratios. For instance, if the receivables in days’ time period for the company is reduced from 157 days to around 120 days, then the receivables turnover would increase to around 3.07 times which is much better as compared to the current situation. Secondly, if the payable days are also increase for example to 70 days, then the pay ables turnover would decrease to 5.21 times. This is going to have a significantly positive impact upon the cash position of the company. ...............

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