Calculation Of Profit And Expenses Of The Company - Case Study Example

Calculation Of Profit And Expenses Of The Company 1) The company’s sales have increased, but this increase is quite less when you see the huge investment that the firm has undertaken to go “national”. Firm’s other expenses have also increased by a greater proportion than the increase in the sales. As a result, the company’s net income has been turned into net loss. 2) It is clear from expansion that more fixed assets have been acquired. This is financed by borrowing from the bank, and as a result liabilities have increased.

However, total current assets have also increased because the firm is holding more inventories now than before. 3) Fixed assets have been acquired by using the external finance techniques such as bank borrowing. This has increased the company’s liabilities. 4) NOPAT: 2008 2009 $87,960 $(95,136) Operating Current Assets: 2008 2009 $1075,400 $1926,802 Operating Current Liabilities: 2008 2009 $281,600 $608,960 Net Working Capital: 2008 2009 $793800 $1317,842 Net Operating Capital: 2008 2009 $1138600 $2257632 5) The free cash flow has decreased by $503,936 as a result of expansion. 6) Free Cash Flow is important to determine the actual cash position of the company after adding back some of expenses that does not incur cash movement such as amortization.

Similarly, it takes into account the movement of working capital and hence does reflect how much money the business has in hand from operating activities. 7) Since the profit is in negative the answer to this question will be negative. This means that the business is not covering its WACC and therefore is adding no value to the money invested in the business. 8) This can be a valid argument if the payment terms say that the company has to pay in the given timeframe of say 30 days. If the company fails to honor its commitment then it may face business problems.

This can be concluded from the financial statements by calculating the creditor’s turnover ratio. It is calculated by: Average Creditors/Cost of Sales / 365 For this company Average Creditors = 905280 COS/ 365 = 13643.8 Creditor’s Turnover Ratio = 905280/13643.8 = 66 Days This proves that the company is paying way later than 30 days commitment to the creditors. 9) It may be a good ploy for increasing sales, but a lot of external factors need to be considered to make sure that this ploy will work.

First of all, the company needs to make sure that the new policy is going to meet its cash cycle that is if its debtors are paying later, then creditors should also be paid later. A company may go bankrupt or short of working capital, if 60 days credit is extended to debtors with creditors asking for 30 days payment. Hence, this factor needs to be considered apart from trustworthiness of the creditor and whether or not the company could afford to invest into the business to make it possible for Rockies Inc.

to increase its credit policy. 10) Retained earnings are calculated by subtracting profits from any dividends paid to the shareholders. Many a times, retained earnings are used to pay cumulative stock holders. A decrease in retained earning signifies higher dividends paid to the shareholder and this is what might have happened in the year 2009. 11) 2886,592/ 100037 = $28.85 Book value is dependent on the net assets value of the company , whereas market value is dependent on demand and supply of company’s shares in the market.