Druthers Forming Limited Harvard Case Solution & Analysis

Important Questions

1.                  Are there any significant changes in the income statement (revenue, expenses, profitability)? If so, what are their possible causes?

Druthers forming’s revenue performance declined during 2005 to 2007, which is because the company’s sales have declined. The decline in revenues and sales is due to an increase in competition in the industry. Besides that, the relationship between Druthers and Sheppard Homes also led to a decrease in the sales of business because the competitors avoid being in relationship with the rival’s suppliers.

The downturns in the economy have also led to a decline in sales, which normally do not have a major impact on the company, because it is insulated from the economic downturns by providing both, the single home and multi-residential markets, although this does have a slight impact on the company's sales.

 In addition to that, the company uses expensive products for its construction, which provides a competitive edge to the companies that use cheaper products, thus, increasing the cost of sales of the company and reducing its gross profit margin growth by 33% in 2006, and 48% in 2007.

In contrast, the operating expenses of the company, although reduced significantly, contribute to a higher amount per sales each year. The company already has a negative gross margin growth, and the increase in operating expenses to sales is further reducing its returns. A greater proportion of operating expenses as compared to sales is because of the Amortization and Rental expenses of the company, which are fixed and can only be reduced if the company shifts to its own property.

The operating income and the net income of the company have also declined over the period because of increased interest expenditure of the company, which is because the company has increased its long term debt significantly in the years 2006, and 2007. The excessive interest payments of the company, and its already declining revenues and increasing expenses result in negative returns of the company for both years.

2.                  Are there any significant changes in the balance sheet? If so, what are their possible causes?

The cash position of the company weakened in 2006, however, it strengthened again in 2007, which is particularly because the company increased the amount of long-term loan that it has secured from the Bank of Ontario. In addition to that, its notes payables growth also indicates that it has improved its cash position by using short-term financing. Besides that, it has also possibly sold some of its assets, giving rise to positive cash flows of the company.

The company’s receivables and inventory to sales percentage reduced over time from 2005 to 2007, indicating that the company has increased the sales its services products on cash. This is another reason behind its improved cash position. However, the net fixed assets of the company have increased due to its investment in the new land and its construction.

The company’s accounts payables growth has reduced significantly over the period, which indicates its efficiency in making payments to suppliers. Besides that, it has increased its long-term debt significantly in 2006, however, the loans to sales growth in 2007 was less as compared to 2006, although it had increased. The increase in debt is due to the company’s investment in new property and construction.

The net worth of the company has improved steadily over the period, which may be because of its increase in assets, which is higher than the increase in its liabilities.

3.                  How good or bad is the cash/equivalent balances and composition?

The cash/equivalent balances of the company are positive, and its cash position is stable. The liquidity ratios of the company are both more than 1, which indicates that the company’s liquidity position is strong and it is not likely to face cash flow difficulties in near future...................

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Manager of the Canadian Commercial Bank (CCB) in Barron, Ontario, reviewed his recent loan request. Cofounder Druthers Formation Limited (Druthers), long CCB client requesting a $ 350,000 loan for the construction of a new building to house Druthers existing operations. Construction is well under way. The manager also said that Druthers currently working without a credit line, and he wondered whether the business can generate enough money to cover expenses, including payments on the new loan. He had one week to decide whether to provide funds and support its rationale. To help in its decision, the manager began with an assessment of the financial performance of the statement of cash flow and ratio analysis, financial statements and projections considering working capital needs, including the implementation of the sensitivity analysis in the days of accounts receivable, inventory and / or accounts debt. "Hide
by Elizabeth M. Grasby, Julie Harvey Source: Richard Ivey School of Business Foundation 8 pages. Publication Date: November 10, 2009. Prod. #: 909N06-PDF-ENG

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