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- How well did ATI perform during the period 1993-1997?
Below are the financial highlights for the five year period from the year 1993 to 1997 indicating significant trends and fluctuation of Advanced Technologies Inc., performance for such period as follows;
From the above table, we can clearly see that the total asset base of the company has been consistently increasing by 68% during 1993-1994, 61% during 1994-1995 and 40% during 1995-1996 and finally 34% for during 1996-1997. This considerable increase in revenue is solely due to increase in sales revenue for such years from a minimum of 10% during 1996-1997 to a maximum of 80% during 1993-1994. There is however slightly a varying trend in the total liabilities which include both long term and short term liabilities. The total liabilities have increased by 204% during 1993-1994 because of substantial increase in trade creditors and the company’s accrued expenses. Although, the company is burdened by the long term debt yet it has defaulted in the interest and current maturities. Further, the cost of goods sold has also increased each subsequent year from a minimum of 14% during 1996-1997 to a maximum of 77% during 1993-1994. This is truly dependent on the volume of sales. The total expenses include research and development costs and the related selling, general and administrative overheads which have increased continuously subject to a maximum increase in 1993-1994 because of major increase in sales volume by 80%. Similarly, the interest expense on the borrowings exhibit major increase of 250% due to higher sales in 1993-1994 but eventually it remains stable. Overall, the company’s financial performance is healthy as we can see that net income is continually increasing which had resulted in equity growth.
For the purpose of analyzing the financial information of Advanced Technologies Inc., a thorough analysis has been performed on the key financial ratios. These ratios have been calculated on the basis of the financial statements of from 1993 to 1997 as follows;
From the above data we can see that due to positive revenue growth and corresponding marginal increase in costs has resulted in good profitability over these 5 years. The earnings before income tax as percentage of sales have gone to the highest by 11.4% during 1995 and eventually slightly decreased due to corresponding increase in finance costs. The cost of goods sold as percentage of sales however remains stable at 55% on average which is a good indicator of company’s effective control over its costs. Similarly, the research and development costs and selling and admin expenses percentage seems satisfactory as a result of which the net income goes the highest up till 1995 and so thus the return on equity. To sum up, the overall profitability is remarkable over these five years.
However, as we proceed further, we can see that the company is suffering inefficiency in management of its assets and more particularly its working capital. Since from 1993 the average collection period is high and it goes to 109 days during 1997. The more worse are the inventory turnover days which are very higher and show that the company is unable to replenish its inventories to make a rapid sale. This is due to lower demand in the marketplace. The working capital thus seems to be stuck and thus due to poor and weak cash flows the company is unable to meet its current obligations and accrued expenses.
Furthermore, another key business concern is the unstable financial leverage as total liabilities have exceeded by 50% and has reached to 64% in 1997. Thus total debt to equity ratio is 57% which is considered to be high enough and thus shows that the company is highly geared. The times interest earned was high at 6.7 during 1996 and deteriorated to 2.4 in 199. The current ratio has decreased but still considered to be satisfactory as it is still above 1 in the year 1997.
Cash Flow Analysis
From the following cash flows over the four year period we can see that cash flow from operations are negative. This shows that the company is suffering from liquidity crisis in its poor management of cash flows. Quite evidently, this is due to increase in accounts receivables and inventories. The investments in capital projects are going high each year to a maximum of $ 37.6 million in the year 1996. However, the financing from bank has been considerable increased at 93.9 million in flow of cash in the year 1997.
To sum up, the cash flows clearly indicate that the company is not self sufficient to generate funds from its operations. Currently, it is totally dependent on bank borrowing.
- What are the biggest challenges facing Advanced Technologies, Inc (ATI) as of October 1997?
The following are the biggest challenges for Advanced Technologies, Inc (ATI) as of October 1997.
(a) Liquidity crisis followed by poor management in working capital thus leading to weak cash flow funds mechanism. Since the collection period has gone high and so thus the inventory turnover days due to low demand, it has become difficult for the company to generate funds more frequently. Consequently, it is more probable that this will impair the company’s ability to discharge its liabilities towards its suppliers.
(b) Being highly geared due to excessive reliance on bank borrowing. Although, the company has not yet defaulted in meeting debt obligations but there is a significant risk of default if these circumstances continues to deteriorate in the long run. Thus, it will result in unnecessary covenants and further charge of the bank over the company’s present and future financial assets.
(c) Fluctuation in the demand factor in the semi-conductor industry.
(d) Competition and competitive advantage through region wise capturing of market base over a diversified customer’s portfolio.
(e) Loss of market share due to non-payment of dividend over the years.
(f) Increase research and development costs without any effectiveness in the process such as development of new technologies to uphold the competitive advantage.<.............
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