El-Con Construction Inc - Case Study Example

Case analysis-El-Con Construction Inc (El-Con) This case is about the different ways through which El-Con can optimize its shareholders wealth. In 2010, El-Con was requesting from Oakville Hydro amount of $450,000 for hydrovac truck and $50,000 to cover its working capital needs. Rob Lister, the CEO of Oakville Hydo though that El-Con was qualified for the loan based on its recent performance though he did not know if granting the loan was in the best interest of Oakville Hydro company. Based on the company previous performance, there are several ways in which it could maximize and optimize its shareholders wealth. It is therefore recommendable for El-Con to seek different ways of maximizing the shareholders wealth before settling on the best. The best ways or strategies to optimize owners wealth is by ensuring continuous cash flow in the company. Different scenarios on which the firm can optimize its shareholders wealth will be discussed. The different scenarios for considerations include initial public offering and investing its excess funds to maximize profit, obtain a loan to obtain the required funds-Building credit and Shareholder wealth. 1. Initial public offering and investing its excess funds to maximize profit The company should hold initial public offerings and sell them as common stock to the public. Based on the previous performance, the company can thrive well without the common stock but should go for it in order to obtain enough funds to tend to all of its constructions needs. The use of initial public offering will help in profit maximization. Initial public offering will help the company to expand its investments as it will provide the company with enough liquidity. Liquidity ratios 2009 2008 2007 Current ratio 2.8 2.73 3.38 Acid test 2.31 1.72 1.75 Working capital 2.8 2.7 3.4 The current ratio and acid test of the company for the three years was more than 1 which means that the company was in a better position to cater for its liabilities and obligations using its assets. Working capital measures the efficiency of as well as its short term financial health. The ratio determines whether the company has enough short term assets to cover its short term debts. The working capital ratio for the company for the three years is more than 2 which means that the company was not investing in its excess assets and its lack of enough funds can be attributed to that. This means that the company is in a better financial position since its assets outweighs the liabilities and should invest its excess assets to earn income. The company should choose to invest in mutual funds, real property or even insurance products. This will earn the company interest. Investing the excess assets will be a good way for maximizing income by the company which would then earn the company enough capital for the required machinery. Using initial public offering and investing its excess funds will be of help to El-Con as it will help the company to acquire the required liquidity for it to acquire the required machines. The required amount of $450,000 for hydrovac truck and $50,000 to cover its working capital needs is a small amount for the company judging from the past performance and could therefore be acquired by initial public offering and investing in excess assets. 2. Obtain a loan to obtain the required funds-Building credit Obtaining a loan like the loan request from Oakville Hydro could another good way of maximizing the shareholders wealth. Building credit is a deliberate and a planned borrowing which is aimed at increasing the reputation of a firm in the lending market and granting it a larger access to large sums of capital. This greater access of money helps the company in financing stronger expansion and allows it to generate real wealth. The working capital of El-Con for the three years indicates that the current assets are more than the current liabilities which means that it does not have any problems paying for its obligations. As a result, building credit by borrowing from Oakville Hydro could a good way of maximizing shareholder wealth-through the expansion of its operations, the shareholders will earn increased dividends. 2009 2008 2007 Current ratio 2.8 2.73 3.38 Acid test 2.31 1.72 1.75 The current ratio and the acid test are more than the recommended ratio of 1, and this means that the company was in a better position to pay for its obligations using its current assets. This means that it would not have any problems borrowing money from Oakville Hydro to finance its expansion needs as it is in a better financial position to pay all its debts. 3. Shareholder wealth Efficiency ratios are used in analyzing the performance of a company by determining how well the company uses it liabilities and assets internally. The efficiency level of El-Con is higher than that of the industry as shown below. Efficiency ratio 2009 2008 2007 Age of receivables (days) 82.7 74.1 103.4 Age of inventory (days) 27.9 23.9 46 Age of payables (days) 75.5 87.6 105.1 The above ratios show that El-Con does not perform well and compared to the industry norm and this is an indication of a poorly managed company. As a result, the firm should consider shareholder wealth as a strategy to maximize wealth. Some stockholders usually want to earn profit from holding stock and from selling the stock at the right moment. Other stockholders usually wish to hold the stocks for years and later collect dividend income. To maximize wealth, the company should seek for ways of increasing the company performance through the use of key metrics like earnings per share (EPS) in order to boost the stock prices and to increase the dividend payout consistently. Growth 2008-2009 2007-2008 Internal sales 27.56% 56.67% External sales 34.89% 67% Total sales 28.97% 58.55% Net income after taxes 51% Based on the growth ratios of El-Con, it is evident that the growth for the company reduced significantly from the 2007-2008 to the 2008-2009 financial years. The significance decrease is an indication of poor performance for the company, and this makes the company unable to acquire the required funds for expansion. The poor performance of the company is the more reason as to why the company should seek for ways of expanding its company performance in order to increase liquidity. In conclusion, all the above scenarios are recommendable for El-Con and if put into practice could have helped in solving the need for the company to expand its operations. Borrowing or asking for a loan from a different company may not be a prudent idea for El-Con as the company may have its other obligations to cater. Borrowing money is the best option for a company in need of funds urgently but not the best in the long term due to the interests and the obligation which the company ends up into. However, as a consultant, I would have advised the company to consider the use of shareholder wealth. El-Con enjoys the support of a large parent company and could have used that chance to increase its earnings per share. By doing this, company will have enough liquidity to secure the required contracts for expansion. The use of this option would give El-Con the required buying power in order to secure the required contracts and for it to expand its operations. This would have saved the company the trauma and stress which other companies faced during the period of a struggling Canadian Economy. The company would have had enough liquidity to survive through the period and be able to secure enough contracts as it planned. Works Cited Moyer, Charles, McGuigan, James, Rao, Ramesh and Kretlow, William. Contemporary Financial Management. Cengage Learning, 2012, pg 6 Read More