Macadams Case Study

This Increase was necessitated by the fact that Macadams had embarked on an solving spree Ana required tons Tuning to secular Lavas Br others In I-array 1996, as head as to fund the investment in new factories, earthly concern and distribution warehouses across the country. The unforesightful barrier debt had incrementd by 229%. This make up would have been necessary to fund their working capital obligations, as short-circuit(p) term debt is significantly more(prenominal) expensive to service than long term debt. Despite the massive increase in debt, the interest cover proportionality is still healthy.This however, is not a currency based ratio and gives us no indication as to whether the many is able to make its immediate payment payments to service the increase quantities of debt. The certain ratio and quick ratio gives us an indication of the companys ability to repay its short term debt. Macadams have a very high modern ratio, which shows that on the accrual basis the companys short term summations are readily available to pay off its short term liabilities. The inventory on hand days have change magnitude, in concert with the debtors collection period.This further exacerbates the cash flow problems as their cash is bind up in working capital. The longer collection period is believably indicative of more relaxed reedit toll while this may boost gross revenue and may well be a contributing factor to the change magnitude turnover, it also presents a problem to the businesses scofflaws as well as an increase bad debt risk. Both the fixed asset turnover and total asset turnover have declined, due to an increased asset base end gratuity from large acquisitions in the current year, as well as the inability to use these assets as efficiently as possible.This is supported by the increased profit margin discussed below. Profitability The business displayed healthy turnover, which increased by 58. 5% from the prior ear. The group is obviousl y doing well in terms of growth, but perhaps they were exhausting to grow too fast. A 58. 5% increase in turnover cannot be sustainable without a salutary balance sheet to support it. The turnover growth in the current year (1996) was largely attributable to surging demand for their products, a genial exchange rate for their exports and acquisitions of businesses which complement their existing operations.Their operating margin was up from 10. 8% to 14. 9% showing that the company was operating more efficiently. winnings profit margin increased from 7. 4% to 8. 5%. Not still were they boosting turnover, they were also managing to increase their margins. Total net profit attributable to shareholders was up 81% from the prior year. Cash flow From the ratio analysis higher up as well inspection of the face of the income statement, Macadams appear to be making higher sales and larger profits off of these sales. Upon inspection of the cash flow statement, a different picture is see n.The large increase in working capital of 595% from R 2, 7 million to R 19 million, resulted in Macadams Delve unmade to Tuna tenet operating Ana commit satellites. I Nils introduction between the two statements highlights the increased profitability, but negatively charged (and worsening) cash flows. A further draw-down of increased working capital speak to is explained in the balance sheet with an increase in inventory of 66% (R 12 million) to meet consumer demand which was funded out of cash resources as well as increased debtors of 129% (R 15 million) due to increased credit sales.Furthermore, creditors increased by 87% (R 8 million), which only partially offset the increase in current assets. Conclusion Macadams is earning high sales and profits, but has honorable cash flow problems I. . The business is too successful, as they are trying to grow too quickly. Cash is seen to be the lifeblood of a business and the accrual of accounting profits are meaningless unless they are converted into cash flow.There are certain options available to overcome this problem, being Cutting sticker on growth (which is never popular) Increasing borrowings (which wouldnt be a sharp-witted choice, as the movement in the cash-flow statement shows an inability to service current interest payments) Improving working capital management (which would necessitate a cut back in Roth) Arrange alternative financing (a fair solution by means of sale and leasebacks), or Issue more shares (which is what was chosen) Macadams nearly failed as a business despite the fact that they had a successful idea and product that was in high demand.They resolved this by issuing more shares to institutions for cash, as well to fund the acquisition of Livings Pros and other fixed property acquired. They also recommended a capitalization issue in lieu of cash dividends to retain as much cash militia as possible. If I owned shares in this company at this point I would (buy/sell)