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Caltron Ltd Case Solution

Solution Id Length Case Author Case Publisher
1258 1319 Words (6 Pages) Dan Thompson Ivey Publishing : 906B25
This solution includes: A Word File A Word File and An Excel File An Excel File

Caltron was established in 1971 by Jenny Jones to provide quality electronic calculators to the scientific and business communities. Caltron was 100% owned by the Pulsar Computers, yet it was not performing financially well as compared to the other calculator manufacturer, Pulsar still kept its interests integrated into Caltron. With the rapid growth of the microcomputer industry, most of the calculator producers in North America moved their assembly lines to abroad to reduce labor costs. Whereas Caltron committed to remaining integrated at the same place and reduced its labor costs with the automation of its manufacturing processes.

Following questions are answered in this case study solution

  1. Financial Ratios

  2. Cash Flow Analysis

  3. Pro-forma Statements Analysis

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Case Analysis for Caltron Ltd Case Solution

In the year 2002 the company heavily invested in the renovation and the automation of the pieces of equipment, due to such automation less-skilled workers lacked production. Due to less experience in using automated machinery, the labor force faced many difficulties in particular and Caltron in general. The company again increased its profitability ratios by the year 2003 and coped with the competing situation. The company was performing above the industry before the event of automation, but it felt considerably down in the year 2002.

1. Financial Ratios

The current ratio of Caltron indicates that it is in the zone of Solvency as the company has established greater current liabilities as compared to the current assets and it is well below the industry average. Furthermore, the company is also lacking liquid assets that can safeguard it against any current obligations. The number of days, the company takes to recover its accounts receivables also indicating the elevated risk of financial leverage.

The company debt ratio is also increasing which shows that the company’s assets have a greater proportion of debt. The company is also facing the cash flow problems, as it lacks the ability to pay its creditors in the short period, which would ultimately increase the liquidity risks for the company. Due to the increased liquidity risks the company has to pay higher interests on its liabilities, resulting in increased cost of borrowing.

The performance of the company is improved a bit in the year 2003 but still has not attained its previous status. The company lacked in its efficiency of generating the profits as compared to the other companies in the same industry. As the company is not generating much revenue from the sale of calculators as compared to the assets it holds. Caltron has introduced more advanced versions of calculators, but it remained unable to sell greater outputs of the inventories.

Financial Ratios Table

 

2001

2002

2003

Industry Averages

Current Ratio

2.99

1.82

1.39

2.7

Cash Ratio

0.024

0.009

0.012

0.45

Inventory Turn Over

41 Days

76 Days

94 Days

60 Days

Accounts Receivable Turnover

19 Days

33 Days

40 Days

32 Days

Accounts Payable Turnover

26 Days

24 Days

43 Days

15 Days

Cash Conversion Cycle

93 Days

110 Days

95 Days

77 Days

Fixed Asset Turn Over

5.422

4.502

5.180

7

Total Asset Turnover

1.77

1.68

1.72

2.5

Debt Ratio

42%

67%

75%

40%

Times Interest Earned

7

1

1

8

Gross Profit Margin

18%

16%

15%

22%

Operating Profit Margin

9%

4%

3%

13%

Net Profit Margin

4.85%

0.58%

0.06%

6%

Return on Assets

8.58%

0.98%

0.11%

15%

Return on Equity

21.7%

4.5%

0.6%

25%

2. Cash Flow Analysis

The cash flow statement of the company shows that the company has incurred a great loss in 2002, which is assumed due to the changes in the company’s infrastructure. The company incurred a $ 294,340,000 loss in 2002 due to such changes. But soon the labor force learned the functionality of the automated machinery and the company became able to generate cash from its operations. Due to the loss in the previous year the company has faced a serious setback to its sustainability. As it is forecasted that the company is growing hence, it would be generating greater cash equivalent in the later years.

3. Pro-forma Statements Analysis

The company is growing over the year and hence generating greater profits due to greater production of inventory as a result of the advanced production system. Further, the company would be able to generate greater cash that would decrease the risk of solvency for the company. The growth in the company shows that the company would overcome the consequences of the transition phase in the upcoming years and it would be able to gain a greater share of the market. Due to the automated machinery, the production of the company is going to increase considerably which would ensure sustainable growth of the company.

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