As the Vice-President of the Credit Department of Overseas United Bank, you are in charge of...

 
 
 
 

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As the Vice-President of the Credit Department of Overseas United Bank, you are in charge of giving final approval to all loan applications. King Appliance Manufacturing Company, a new corporate customer has approached the bank to request for a substantial line of credit. May, one of your credit officers, has been working with the company and has recommended approval of the loan. She submitted the following report: Credit Analysis of King Appliance Manufacturing Company King Appliance, owns numerous trademarks in the vacuum cleaner industry, including the famous product introduced in 1990, the Dirt Devil Hand Vacuum. Since 1990, the company has made significant progress in gaining market share. At the end of 1996, King had 20% market share in the vacuum cleaner market, just 8% behind the industry leader. The tremendous gain in market share should continue since King has doubled advertising and promotion expenditure in each of the past three years. The company has also increased expenditure in engineering and product development. Net sales have increased 230% from 1994 to 1996. Despite the large increase in advertising and engineering expenditures, King has still managed to increase net earnings by 72% from 1994 to 1996. The Company also has a strong net working capital position. Current assets, comprised mainly of accounts receivable and inventories, are 2.5 times greater than current liabilities. This company, which was listed on the Singapore Stock Exchange in 1995, is a high growth company. I highly recommend granting a loan to them. You note that May's analysis did not consider the statement of cash flows, which you decide to review before making a final decision. The attached cash flow statement was presented. Required Analyze the statement of cash flows (fill in the blanks) for King Appliance Manufacturing Companyfor the years, 1994, 1995 and 1996. S$'millions Cash flow from operating activities (CFO) Net income Adjustments for non-cash items Depreciation Changes in Working Capital (Increase)/Decrease in assets Net accounts receivable Inventories Prepaid expense and others (Decrease)/Increase in liabilities King Appliance Manufacturing Consolidated Statement of Cash Flows For the Years Ended 31 December Accounts payable Accrued advertising and promotion Others Total adjustments Net cash (used in)/from operations. Cash flows from investing activities (CFI) Purchases of tooling, property, plant and equipment Increase in tooling deposits Purchase of treasury shares Net cash (used in) from investing activities Cash flows from financing activities (CFF) Proceeds from bank loan Payments on bank loans Payments on finance lease Payments on dividend Proceeds from issue of new shares Proceeds from/(payment) on note payable Net cash from/(used in) financing activities Net increase/(decrease) in cash Cash at beginning of the year Cash at the end of the year 1994 11.7 1.4 -17.9 -9.8 4.5 4 0.5 -17.3 -5.6 -4.7 -4.7 32 -17.5 - -5 2 11.5 1.2 0.1 1.3 1995 32.8 2.9 -7.2 -30.3 -3.7 14.3 2.1 4.5 -17.4 15.4 -9.5 -4.6 -14.1 108 -122.3 - -28.4 42.3 -2.2 -2.6 -1.3 1.3 1996 20.1 6.2 -2.6 -35.3 -3.6 -8.2 2.9 10.3 -30.3 -10.2 -31.91 -1 -13 -45.9 210.9 -154.6 -0.2 56.1 Profitability While net sales increased 230% from 1994 to 1996 (May's report), net profit rose at a slower pace of 72% for the same period. While net profit increased from $11.7 million to $32.8 million in 1995, it fell to $20.1 million in 1996. Overall, King is still a profitable company. Cash from operating activities The company was unable to generate cash from its core business in 1994 (-$5.6M) and 1996 (-$10.2M). In 1995, it was able to generate a positive cash flow from operations mainly because . . . . . . Analysis of Cash Flow Statements As sales volume grow, it is natural that the accounts receivable and inventory Accounts receivable grew at a decreasing rate. This is quite encouraging as it probably signifies that Inventory increased by more than $$30M for the past two years versus only S$9.8M in 1994. This large build-up of inventory can be explained partially by Nevertheless, it is important to consider whether the firm can sustain its_ Further analysis is required for inventory. The company made use of accounts payable to However, there was a decrease of accounts payable in 1996. This is questionable and may mean that the company is Were they having liquidity problems which their supplier was aware of? As the company is expanding its sales, it is important for King to Further analysis is required. Cash Flow from investing activities Cash Flow from financing activities In the past 3 years, only 1995 showed positive cash flow from operations. Virtually all thecash inflows resulted from + Over the 3 years, the firm increased its spending on fixed assets. This is logical as they are . In 1995, the company also paid out Itappears that the firm was not able to pay dividends in 1996. It is also of concern that the company issued shares in 1995 and bought back shares thenext year. The listing in 1995 could be used to gain publicity for the company. However, it is helpful to know why the company bought back shares in 1996, a year afterit listed its shares in the Exchange and whether it was an attempt for the company to boost its share price in 1996. (This casts doubts on the management's ability in managing the financing policy of the company.) Ending cash balance There were zero cash balances for the last two years. Perhaps King had to use all the cashat year end to However, it is noted that the company has very little cash balance and yet in 1995. As the Vice-President of the Credit Department of Overseas United Bank, you are in charge of giving final approval to all loan applications. King Appliance Manufacturing Company, a new corporate customer has approached the bank to request for a substantial line of credit. May, one of your credit officers, has been working with the company and has recommended approval of the loan. She submitted the following report: Credit Analysis of King Appliance Manufacturing Company King Appliance, owns numerous trademarks in the vacuum cleaner industry, including the famous product introduced in 1990, the Dirt Devil Hand Vacuum. Since 1990, the company has made significant progress in gaining market share. At the end of 1996, King had 20% market share in the vacuum cleaner market, just 8% behind the industry leader. The tremendous gain in market share should continue since King has doubled advertising and promotion expenditure in each of the past three years. The company has also increased expenditure in engineering and product development. Net sales have increased 230% from 1994 to 1996. Despite the large increase in advertising and engineering expenditures, King has still managed to increase net earnings by 72% from 1994 to 1996. The Company also has a strong net working capital position. Current assets, comprised mainly of accounts receivable and inventories, are 2.5 times greater than current liabilities. This company, which was listed on the Singapore Stock Exchange in 1995, is a high growth company. I highly recommend granting a loan to them. You note that May's analysis did not consider the statement of cash flows, which you decide to review before making a final decision. The attached cash flow statement was presented. Required Analyze the statement of cash flows (fill in the blanks) for King Appliance Manufacturing Companyfor the years, 1994, 1995 and 1996. S$'millions Cash flow from operating activities (CFO) Net income Adjustments for non-cash items Depreciation Changes in Working Capital (Increase)/Decrease in assets Net accounts receivable Inventories Prepaid expense and others (Decrease)/Increase in liabilities King Appliance Manufacturing Consolidated Statement of Cash Flows For the Years Ended 31 December Accounts payable Accrued advertising and promotion Others Total adjustments Net cash (used in)/from operations. Cash flows from investing activities (CFI) Purchases of tooling, property, plant and equipment Increase in tooling deposits Purchase of treasury shares Net cash (used in) from investing activities Cash flows from financing activities (CFF) Proceeds from bank loan Payments on bank loans Payments on finance lease Payments on dividend Proceeds from issue of new shares Proceeds from/(payment) on note payable Net cash from/(used in) financing activities Net increase/(decrease) in cash Cash at beginning of the year Cash at the end of the year 1994 11.7 1.4 -17.9 -9.8 4.5 4 0.5 -17.3 -5.6 -4.7 -4.7 32 -17.5 - -5 2 11.5 1.2 0.1 1.3 1995 32.8 2.9 -7.2 -30.3 -3.7 14.3 2.1 4.5 -17.4 15.4 -9.5 -4.6 -14.1 108 -122.3 - -28.4 42.3 -2.2 -2.6 -1.3 1.3 1996 20.1 6.2 -2.6 -35.3 -3.6 -8.2 2.9 10.3 -30.3 -10.2 -31.91 -1 -13 -45.9 210.9 -154.6 -0.2 56.1 Profitability While net sales increased 230% from 1994 to 1996 (May's report), net profit rose at a slower pace of 72% for the same period. While net profit increased from $11.7 million to $32.8 million in 1995, it fell to $20.1 million in 1996. Overall, King is still a profitable company. Cash from operating activities The company was unable to generate cash from its core business in 1994 (-$5.6M) and 1996 (-$10.2M). In 1995, it was able to generate a positive cash flow from operations mainly because . . . . . . Analysis of Cash Flow Statements As sales volume grow, it is natural that the accounts receivable and inventory Accounts receivable grew at a decreasing rate. This is quite encouraging as it probably signifies that Inventory increased by more than $$30M for the past two years versus only S$9.8M in 1994. This large build-up of inventory can be explained partially by Nevertheless, it is important to consider whether the firm can sustain its_ Further analysis is required for inventory. The company made use of accounts payable to However, there was a decrease of accounts payable in 1996. This is questionable and may mean that the company is Were they having liquidity problems which their supplier was aware of? As the company is expanding its sales, it is important for King to Further analysis is required. Cash Flow from investing activities Cash Flow from financing activities In the past 3 years, only 1995 showed positive cash flow from operations. Virtually all thecash inflows resulted from + Over the 3 years, the firm increased its spending on fixed assets. This is logical as they are . In 1995, the company also paid out Itappears that the firm was not able to pay dividends in 1996. It is also of concern that the company issued shares in 1995 and bought back shares thenext year. The listing in 1995 could be used to gain publicity for the company. However, it is helpful to know why the company bought back shares in 1996, a year afterit listed its shares in the Exchange and whether it was an attempt for the company to boost its share price in 1996. (This casts doubts on the management's ability in managing the financing policy of the company.) Ending cash balance There were zero cash balances for the last two years. Perhaps King had to use all the cashat year end to However, it is noted that the company has very little cash balance and yet in 1995.

Answer rating: 100% (QA)

Analysis of the Statement of Cash Flows for King Appliance Manufacturing Company for the Years 1994 1995 and 1996 1994 Net cash provided by operating ... View the full answer