Analysis for a financial case - Essay Example

Company Profile Kota Fibres Ltd. (KF) is one of the most predominant suppliers of synthetic nylon fiber yarns.KF started off its operation in 1962, since then it has been on a steady profitability state. The company produces synthetic nylon fiber yarns which are used in weaving the clothes which are then used in the preparation of saris. These saris have the consistent increasing demand every year due to the increment in the female population of India. Around 500 million women in India wants to wear saris which require at least 2 billion yards of fabric per year to the textile weaving companies as one single sari takes around 8 yards of the fabric.

KF is being run under the management of Ms. Pundir as she is the prime owner as well as the managing director of KF. Problem Statement Currently KF is having serious issues with its cash flow management. KF is totally out of funds to pay off its excise duty taxes as well as having crossed its short-term loan obligations with All-India Bank. The bank has refused to allow the short term credit limit as the company’s current liquidity position is not letting bank to expose itself for more risk.

In order to improve the liquidity position of the company, Ms. Pundir is considering fewer options to free up the cash where it is stuck. She is in kind of dilemma as how to release cash from the stuck areas so that company’s liquidity position on daily basis becomes better and the company could get its short-term credit limit extended from its bank. Analysis Although KF has remained successful in increasing its sales, yet the company’s profitability position is going to be worsened. Primarily because of the increase in cost of goods sold of the company.

From the analysis of previous years’ data, it can be observed that despite of having increased revenues, the net profit margin of KF has slumped from 5.6% to around 3.4%. The working capital management of KF has not shown up-to-the mark results as the company would have to liquidate 30 days requisite immediately. In case of non-compliance, the company may suffer a lot by not having enough cash funds available for advancement. At the same time, the company’s dividend policy is quite unreasonable as the company is hardly managing to earn around INR 1.

3 million a year and paying off its shareholders a massive sum INR 2 million on account of dividend. This is one of the main reasons of the depressed cash flow position of the company. From the balance sheet of the company, the company’s leverage position is consistently on a rising trend which means that the company would have pay more in respect of principal repayments as well as the interest payment. Due to increased level of leverage, the bank has refused to issue more loans to KF as well.

Recommendations After the detailed analysis of the company’s financial position and performance, it is recommended for the company to manage its working capital effectively. In this way, the recommendation of the Pondicherry officer should not be considered as it would increase the accounts receivable resulting in blockage of cash funds. However, the recommendation provided by the transportation and purchasing agent seems to be more beneficial as it would result in the release of cash funds from the inventory.

By keeping the inventory level on a lower scale, KF can prevent its holding cost of the inventories. KF should also focus on improving its dividend policy and allow 60-70% of its net profits available for the appropriations in terms of dividend to its shareholders. References Lee, Alice C., Lee, John C. and Lee, Cheng F. Financial Analysis, Planning & Forecasting: Theory and Application.2nd ed. Singapore: World Scientific, 2009. Print.