ASTRAL RECORDS LTD., NORTH AMERICA: SOME FINANCIAL CONCERNS Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

ASTRAL RECORDS LTD., NORTH AMERICA: SOME FINANCIAL CONCERNS Case Solution

Historical Performance of the Firm

Astral Records Limited was founded in North America. The company is the joint venture between the ARL and an American Venture Capital Firm, Bendini, Lambert and Locke. The company is operating in a compact disk industry and it is known as a high quality producer of compact disks. By looking the at the financials statements of the company, the past performance and financial health of the company could be identified.

It is clear from the ratio analysis over the last four year that the financial health of the company is decreasing with each passing year. Although continuous growth in sales have been shown and total sales have increased by more than 50% in last four year, but along with the increase in sales, cost of goods sold have also increased significantly, which results in an increase in net earnings just by 6%.

Moreover, while looking at the balance sheet, the company is unable to manage its working capital and the inventory level of the company has increased by more than 100%, which could be due to the increase in demand however, such high level of inventory depicts that the company is capitalizing its assets, which could create a problem of liquidity. In addition to this, the company is highly engaged in debt and the gearing ratio of the company is increasing continuously, which means that the company is dependent over debt in order to expand, which could result in loss of investors’confidence.

It is expected that the company’s profitability has not increased as per expectation due to greater increase in expenses as compared to sales revenue. Moreover, increase in debt ratio also increased interest payments. Increase in interest payments also reduces the profitability of the company. Increase in inventory and increase in interest bearing debts also reduce the ability of the company to meet its current debt obligations. Current ratio and quick ratio of the company are also low as compared to its competitors, which indicate it could create distress among the present shareholders of the company. Beside all these factors, the company’s profitability is positive which means there is a significant potential of growth and all these critical issues could be due to the poor management or could be due to global economic crisis.

Forecasting and related Assumptions

In order to identify the financing requirement for the next two years, the free cash flows for the next five years are identified on the basis of common assumption of forecasting.
It is expected that sales will grow by 15% each year, and on this basis sales revenue for the next five years is identified.In order to determine the cost of goods sold and other expenses, the average growth of last four years is calculated. It is expected that cost of goods sold will be 50% of sales and selling and admin expenses will be 21% of sales. By incorporating these values, PBIT is identified.

For the identification of free cash flows, depreciation is added back to the PBIT and capital expenditure is deducted. By applying 41% tax rate, after tax free cash flows are calculated. It is expected that 41% tax rate is identified by using last four years average growth rate. In order to identify the future benefits, terminal value over last years after tax free cash flow is also identified by using 4% future growth rate...................

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