Question: Tofino Ltd manufactures heavy construction equipment Until recently it sold
Tofino Ltd. manufactures heavy construction equipment. Until recently, it sold its products almost exclusively in North America. In 2015, management decided to expand its sales activities to more global markets, in particular emerging economies. In late 2016, the new sales strategy began to be effective and in 2017 sales increased by over 25 percent, with almost all the growth coming from non-North American customers. To make these sales, Tofino had to offer very different payment terms than in the past. Most of the new customers are chronically short of cash and want to be able to pay between two and three years after delivery of the equipment. That way, the projects the equipment was being used for would help generate the cash flow to pay for it. Tofino agreed to these terms to achieve growth. Despite the increase in sales, profit in 2017 is down from the previous year. The decrease in net income is mainly due to increased costs associated with theexpansion to new markets. More concerning is that cash flow has become a big problem and the company has even struggled to pay some of its bills. The amount of cash on hand is frequently below the minimum amount needed for efficient operations. You are an analyst for a small investment dealer and you’ve been asked to do an analysis of some of Tofino’s financial statement information to assess and explain its current situation. In particular, there is concern about the deteriorating performance and cash flow problems. You’ve been also been asked to explain the reasons and the implications of the difference between net income and cash fromoperations.
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