Sources and Uses of Cash • Major Sources: • Inventory • Net Fixed Assets • Accounts Receivable • Accounts Payable
Most sources are short-term in nature. • Inventory - Over the period 1999 to 2001, inventory $1,015,000. • Receivables - The previous owners may have restricted their credit sales in order to control their accounts receivable. However, the decrease in cash tied up in receivables is more likely due to the write-off of heavy bad debts over the past two years rather than an inflow of customer accounts. • Net fixed assets was a major source of cash due to depreciation charges on the firm's physical assets. • Accounts payable - previous owners were stretching their accounts payable to generate cash Accounts Payable will likely become a use of cash as Francois tries to take advantage of the two per cent discount on purchases.
Sources and Uses of Cash • Major Uses: • Working capital loan • Long-term debt • Retained earnings
MB has been trying to relieve its debt load by reducing the working capital loan and paying off its long-term debt. The working capital loan will likely be a source of cash next year if the new loan is granted. • Long-term debt will shift from the debt outstanding of $1,188,000 in 1991 to the $500,000 owed to PFS for the purchase of the business in 2002 resulting in neither a source nor a use of cash. • Retained earnings were a major use of cash due to the net losses over the past two years. This should become a source of cash as Francois turns the business around.
Profitability • Cost of goods sold has been decreasing over time, showing good control over the cost of purchases. • However, total operating expenses have deteriorated due to extremely high bad debt expenses, increased accounting and lawyers' fees, and corporate expenses paid to PFS. • Other expenses have also increased due to high interest expenses on accounts payable and long-term debt. • Net earnings over the past three years has been poor with the company suffering nonexistent profit or losses due to higher expenses. • Materiaux Boisvert is certainly below average and more attention needs to be paid to controlling expenses to increase profitability. • The return on equity (ROE) is nonexistent due to losses.
Liquidity • The current ratio has deteriorated from 1.27 in 1999 to 1.19 in 2001 due to large decreases in inventory and receivables in relation to outstanding liabilities. This ratio is below the industry average which is a cause for concern. • The acid test has also shown slight deterioration; however, 0.51: 1 is not bad since it is likely that this type of business would carry high inventories. Since it is in line with industry averages, this also presents a more favorable liquidity picture.
Efficiency • Accounts receivable days have been decreasing but are still at the high end of industry standards of between 30 and 60 days. Given industry ratios of 27 days, is MB extending unnecessary credit terms to its customers. 70 per cent of sales are industrial so recievables may be longer. • Age of inventory declined over time to 86 days in 2001 due to the liquidation and/or decreased purchases of inventory. It is just higher than industry averages and is not a.cause of concern at this point. • The age of accounts payable has increased to 93 days in 2001 from 63 days in 1999 indicating that owners delayed payments to suppliers in order to retain cash for other purposes.
Stability • The net worth to total assets ratio has improved by five per cent to 37.2 per cent in 2001 due to decreases in total assets. This shows Materiaux Boisvert is 63 per cent debt-financed which is not too bad for a company of this size. Its debt position also improved as the owners reduced their debt load over time. • Interest coverage is alarming at 0.5 times in 2001, which is not much better than 1.0 times in 1999. This company may face an inability to make its interest payments to the bank. • Overall, despite an improved debt position, poor interest coverage makes the company's stability questionable
Growth • Growth figures are unstable and fluctuating, showing very negative results over the past three years. Overall, this company's performance has not been too favorable.
The projected current ratio declines slightly but increases in 2003 due to the lower age of accounts payable. • The acid test remains relatively stable. Interest coverage greatly improves due to better profits and decreased interest expenses. • The company's ability to make principal payments is not too bad. • The firm's ability to pay interest is promising given the lower interest payments that need to be covered.
Personal assets of 250 also available • Receivables and inventory cover the loan
Many favourable qualities • Character generally good
Do not grant extension • Extend 2.2M • Extend some other amount