IMT Ceres

Name Deepika Chandrashekar
Question 1
Question 1A: The company’s profits have increased by ~30% from 2002 to 2006(E).
How much of the profits estimated for the year 2006(E) will translate to the 'cash flow
from operations' for the same year? Which of the three categories in the cash flow
statement has contributed majorly to the decrease in the 'change in cash' by the company
from 2003 to 2006(E)?
Ans: $226 thousand will translate to the Cash flow from Operations for the year 2006(E)
Investing & Operating Cash Flow has majorly led to decrease in ‘change in cash’
Reason 1 - Investing Cash Flow: Due to investment in PP&E, Land & Other Assets.
Reason 2 - Operating Cash Flow: Due to Depreciation & Amortization, Change in

Inventories & Change in Accounts Payable.
Question 1B: What is the trend in cash flow from 'operating activities', 'investing
activities' and 'financing activities' over the years? Identify at least one reason for the
increase/decrease in each of the three categories of the cash flow statement. Explain your
answer.
Ans: 1. Operating Cash flows show decreasing trend. The major reason for decreasing
trend of Operating cash flow is increase in Accounts receivable.
2. Investing Cash flows show increasing trend from year 2003 to year 2005 and
decreasing trend for a year from 2005 to year 2006. There is no new investment in land
done after year 2004, which led to increase in investment cash flow.
3. Financing Cash flow has increasing trend from year 2003 to year 2005 and decreasing
trend from year 2005 to 2006. The increasing trend in Financing cash flow from year
2003 to 2005 was due to increase in Debt and the decreasing trend in Financing cash flow
from year 2005 to 2006 was due to decrease in overall debt.
Question 1C: Analyse the expected cash flow profile of the company for the year 2006(E)
and comment on any 3 of the following factors: 'self-financing of investments', 'funding of
investments', 'cash position of the company' and 'free cash flow'.
Ans:
1. Self-financing of investments – The company is not able to self-finance its

investment as the Operating Cash flow is very less compared to Investing cash flow. For
year 2006, the Operating cash flows are $226 thousand, which is much lesser than the
value invested by the company $1398 thousand. Hence it proves that company is not able
to self-finance itself.
2. Funding of investments – A small percentage of the funding of $226 thousand comes

from operations as operating cash flow and the major funding of $969 thousand comes
from the financing activity as debt taken by the company. Even though the operating cash
flow and financing cash flow are unable to fund the investments and there is a deficit.
3. Cash Position of the company – The company has expenses more than it could
generate the revenue; hence the cash position of the company is ‘Negative’.
Question 2
Question 2A: Calculate the operating working capital of Ceres Gardening Company for
2002–2006(E).
Ans: Operating Working Capital = Accounts Receivable + Inventories - Accounts Payable
Question 2B: Calculate the operating working capital/sales ratio of Ceres Gardening
Company for 2002 to 2006(E).
Ans: Operating Working Capital/Sales Ratio = OCW / Sales
Question 2C: Calculate the DIO, DSO and DPO for the company from 2002 to 2006(E).
Ans:
1. Day Sales Outstanding (DSO) = Accounts Receivable / Sales Per Day

2. Day Inventory Outstanding (DIO) = Inventory / Cost of Goods Sold per day
3. Days Payable Outstanding (DPO) = Accounts Payable / Cost of Goods Sold Per Day
Question 2D: What is the implication of the long credit period given to dealers by Ceres
Gardening Limited on its working capital? Explain your answer by specifying at least
one reason.
Ans: OWC has decreased between year 2003 to 2006(E) due to decrease in the inventory.
This indicates that the company isn’t converting its inventory into cash as quickly as
before. This is due to the extended 120 days payment term for all the products purchased
through GetCares Program. This change in the payment terms impacted on the working
capital.
Question 3
Prepare and present the economic balance sheet for Ceres Gardening Company and
calculate the capital employed by the company.
Question 4
Question 4A: Calculate the key profitability ratios for the years 2002 to 2006(E).
Ans:
1: Variable Margin : VM = (Sales revenue - Cost of goods sold)*100/Sales
2: Operating Margin : OM = Operating income*100/Sales

3: Return on Equity : ROE = Net profit*100/Owners' equity
4: Return on Average Capital Employed: ROACE = Earnings after taxes before interest/{(Opening
capital employed + Closing capital employed)/2}
Question 4B: What is the trend in RoE from 2002 to 2006(E)? List down at least one
reason for the increase/decrease in RoE by assessing the drivers of RoE. Explain your
answer in not more than 30 words.
Ans: RoE is continuously decreasing from 23.7 in year 2002 to 16.04 in year 2006.
Due to lower the RoE, the equity ratio of the company is high. As part of the GetCeres
campaign, the company gave a lot of credit to dealers during this period, therefore we
require more funds to run the operations, which will result in raised shareholder equity
and decreased ROE.
Question 4C: What is the trend in RoACE from 2002 to 2006(E)? List down at least one
reason for the increase/decrease in RoACE by assessing the drivers of RoACE. Explain
your answer in not more than 30 words.
Ans: The Trend in RoACE is ‘constant’ and the drivers of the operating margin ratio.
The margins of the company are constant but the efficiency which is calculated as
EBIT/(1-T)*100 this will be the earnings after the taxes before interest/ (capital
employed beginning+ capital employed ending)/2 this is RoACE of the company which
is increasing showing the efficiency of the company.
Key drivers of RoACE is

1. Operating Margin (EBIT/Sales)
2. Ef iciency (Sales/CE)
Question 5
List down at least two pros and two cons of the GetCeres program for Ceres Gardening
Company. Would you recommend continuing with the program? Justify your answer.
Ans:
Pros:
1. Get Ceres program sales had increased to $35.1 million dollars in 2005 to
$42.6millionin 2006, approximately 80% of sales were to dealers.
2 .The Company was very excited as it had done well with financial viability with the
breakeven point approximately $30 million of revenues under the current cost structure.
Cons:
1. Regardless of the payment terms given to the dealers, the payment was delayed by the
customers to 120 days which affected the business drastically. The account receivables
has increased by 73% from $2416 thousand to $4185 thousand in two years from 2004 to
2006.
2. As the Accounts Receivable has significantly increased, the Operating cash flow has
reduced by 73% from year 2004 to 2006 from $838 thousand to $226 thousand. This is a
significant reduction in operating cash flow and this will not able to support investing
activities.
Recommendations: The Idea of GetCeres program is good but it should not be

continued as the cash flow is decreasing and investment is increasing. We have the
payment terms also increasing along with which again delays the payments. This will
lead to dealers not paying till the goods are sold in the market resulting in drastic shut
down of manufacturing plants

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Name Deepika Chandrashekar

Reason 2 - Operating Cash Flow: Due to Depreciation & Amortization, Change in

1. Self-financing of investments – The company is not able to self-finance its

2. Funding of investments – A small percentage of the funding of $226 thousand comes

Ans: Operating Working Capital = Accounts Receivable + Inventories - Accounts Payable

Ans: Operating Working Capital/Sales Ratio = OCW / Sales

1. Day Sales Outstanding (DSO) = Accounts Receivable / Sales Per Day

1: Variable Margin : VM = (Sales revenue - Cost of goods sold)*100/Sales

2: Operating Margin : OM = Operating income*100/Sales

Key drivers of RoACE is

Recommendations: The Idea of GetCeres program is good but it should not be

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