The financial statements reveal several signs that FBN experienced cash flow problems in mid-2014:
1) The current ratio fell from 0.30 to 0.14, indicating current liabilities were rising faster than current assets.
2) The quick ratio dropped from 0.18 to 0.08, suggesting inventories would need to be liquidated to pay current liabilities.
3) The total assets turnover ratio declined from 0.7 to 0.6, meaning FBN was generating less business relative to its total assets.
Additional signs included high levels of accounts receivable and inventory, a decreasing profit margin, increasing leverage, paying off all long-term debt, and a declining return on assets.
The financial statements reveal several signs that FBN experienced cash flow problems in mid-2014:
1) The current ratio fell from 0.30 to 0.14, indicating current liabilities were rising faster than current assets.
2) The quick ratio dropped from 0.18 to 0.08, suggesting inventories would need to be liquidated to pay current liabilities.
3) The total assets turnover ratio declined from 0.7 to 0.6, meaning FBN was generating less business relative to its total assets.
Additional signs included high levels of accounts receivable and inventory, a decreasing profit margin, increasing leverage, paying off all long-term debt, and a declining return on assets.
The financial statements reveal several signs that FBN experienced cash flow problems in mid-2014:
1) The current ratio fell from 0.30 to 0.14, indicating current liabilities were rising faster than current assets.
2) The quick ratio dropped from 0.18 to 0.08, suggesting inventories would need to be liquidated to pay current liabilities.
3) The total assets turnover ratio declined from 0.7 to 0.6, meaning FBN was generating less business relative to its total assets.
Additional signs included high levels of accounts receivable and inventory, a decreasing profit margin, increasing leverage, paying off all long-term debt, and a declining return on assets.
The financial statements reveal several signs that FBN experienced cash flow problems in mid-2014:
1) The current ratio fell from 0.30 to 0.14, indicating current liabilities were rising faster than current assets.
2) The quick ratio dropped from 0.18 to 0.08, suggesting inventories would need to be liquidated to pay current liabilities.
3) The total assets turnover ratio declined from 0.7 to 0.6, meaning FBN was generating less business relative to its total assets.
Additional signs included high levels of accounts receivable and inventory, a decreasing profit margin, increasing leverage, paying off all long-term debt, and a declining return on assets.
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Question 1:
What evidence can you observe from analyzing the financial
statements that might signal the cash flow problems experienced in midyear 14? There are many signals that reveal a problem in cash flow in mid-year 14 as follow: 1. When looking at the current ration which is calculated by dividing current assets by current liabilities it can be seen that it is fall from 0.30 to 0.14 which means current liabilities are rising faster than current assets and this could indicate trouble (financial difficulty), especially that creditors like to see a high current ratio. Because the current ratio provides the best indicator of the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash fairly quickly. 2. Quick ratio which shows the ability of the company to pay off shortterm obligations without relying on the sale of inventories (inventories are the least liquid of a company current assets). A large decrease in the quick ratio from 0.18 to 0.08 means that inventories would have to be liquidated in order to pay off current liabilities. 3. Total assets turnover ratio which measures the dollars in sales that are generated for each dollar that is tied up in assets. It can be seen that the total assets turnover ratio is fallen from 0.7 to 0.6 which means that FBN company is not generating as much business given its total assets investment. (i.e. it uses its assets inefficiently). 4. Days receivables which represents the average length of time that the company must wait after making a sale before receiving cash. 37 and
38 of days receivables indicate that customers on average are not
paying their bills on time. High levels of account receivables (as shown on the balance sheet)which means that there more product sold in credit than in cash and direct use of funds; causing high level of net operating working capital (NOWC) which negatively affect free cash flow (FCF) and stock price. 5. High level of inventory ( as shown on the balance sheet) add to net operating working capital (NOWC) which negatively affect free cash flow (FCF) and leads to lower stock prices. 6. Profit margin: the decreasing in profit margin ratio from 1.5% to (7.0%) indicates inefficient operations of the company. 7. Leverage ratio: increasing in the leverage ratio over time indicate that the company rely on debt (as shown on balance sheet and cash flow statements)to finance its operations. Too much debt can be dangerous for a company and its investors. 8. Decline in the long-term debt ratio from 81.5% to 0% means that FBN Company paid off all of its long-term debt in year 14 which would have a big impact on cash flow. 9. Decline in the return on asset ratio (ROA) from 7.5% to 0% means inefficient management in employing the companys assets to make a profit. 10. Finally, when looking at the statement of cash flows, the most noticeable is the negative change in cash flow.
Question 2: either
the
Can FBN avoid bankruptcy during year 15? What changes in
design
or
implementation
of
FBNs
strategy
would
you
recommend? I dont believe that the company can avoid bankruptcy during year 15 but the following are some recommendation to improve its cash flow: 1. Put a strict system to collect accounts receivable. 2. Put a plan to manage the inventory in more efficient way. 3. Re-plan its financial strategy and asset acquisition policy.
