NorthStar Aerospace Case Study Solution
Profitability Ratios:
Profitability ratios determine the capability of the company to generate earnings with the comparison of its expenses. We can analyze the profitability position of the company by calculating gross profit and a net profit ratio of the company.The reported gross profit margin and net profit margin of North Star Aerospace were 27.24% and -18.16% respectively in 1998, while in 2001theywere 28.75% and 0.32% respectively. The profitability performance of the company reveals that the company effectively controls its expenses thus this improves the overall earning position of the company. (Adedeji, 2014)
Ratios related to Liquidity:
Ratios related to Liquidity determine the ability of the company to pay out its obligation. We can analyze the liquidity position of the company by calculating current and quick ratio of the company.The current and quick ratios of the company were 2.82 and 1.52 respectively in 1998 while in 2001 they were 2.28 and 1.11 respectively.(Adedeji, 2014)
Gearing Ratio:
Gearing ratio reveals the amount of equity and debt in the capital structure of the company. We can determine the gearing position of the company by calculating equity to total assets, debt to assets and debt to equity ratio.In 1998, the reported shareholder’s equity/total assets, total debt to total assets and total debt to total equity ratios of North Star Aerospace are 0.20, 0.8 and 2.83 respectively while these ratios improved with the passage of time and hence in 2001 they were 0.21, 0.79 and 2.19 respectively.
Performance Ratio:
The effectiveness of the company that how well it uses its resources to generate the income can be determined through the performance ratios. To analyze the performance of the company we generally calculate inventory turnover days, receivable turnover days and payable turnover days ratios. The inventory turnover days, receivable turnover days and payable turnover days ratios of the company were 385.06, 164.86 and 287.96in 1998. With the passage of time, inventory turnover days, receivable turnover days and pay ables turnover days deteriorated. In 2001, inventory turnover days, receivable turnover days and payable turnover days were 200.29, 82.13 and 115.26 respectively.(Adedeji, 2014)(See Exhibit 1)
Operating Performance:
The outcomes of ratio analysis revealed that the operating performance of the company from 1998 to 2001 is in improving phase. The results show that the company effectively controls its expenses to generate the incomes. Moreover, by analyzing current assets and fixed assets we can conclude that the company invests more in current assets to support its short-term status hence, therefore, the long-term growth of the company is in threatening position.
Cash flow statement
The purpose of cash flow statement is to show the inflow and outflow of cash. It shows that from where the entity is generating the cash and from where it is using its cash.
In cash flow statement, we use cash-based accounting instead of accrual based accounting. Accrual-based accounting, most of the companies use it in the income statement and balance sheet. This is important in a way that sometimes company generates the revenue but not received the cash, so cash flow statement shows that inflow and outflows of the cash.
The cash flow statement of North Star Aerospace shows that company has generated 25.9 million dollars from the operating activities in the fiscal year 1999.
However, company has generated 31 million dollars of cash from investing activities in the fiscal year 1999.
Moreover, the company generated negative cash from financing activities, it has generated 79 million dollars from financing activities, and it is because of decreasing in the long-term debt. Long-term debt has decreased by 79.2 million dollars in the fiscal year 1999.
The cash flow statement shows that company has generated negative cash in the three consecutive years 1999, 2000 and in 2001.
The company has generated total cash of -21.5, -17.19, -14.9 million dollars in 1999, 2000, 2001 respectively.
Pro Forma Financial Statements
Forecast
To analyze the future performance of the company we forecasted the income statement and balance sheet of the company of the next one year of 2001.
NORTHSTAR AEROSPACE Harvard Case Solution & Analysis
Forecasted Income Statement
The forecasted income statement is showing that sales are decreasing by 10% in the fiscal year 2001, as it is mentioned in the case that company’s management felt that its revenue in 2002 will decrease by 10%. Additional 55.2 million were added to its net revenues, this revenue will come from its newly acquired subsidiaries. The cost of goods sold is estimated that this will be the same percentage of sales as this was in 2000. The administrative expense is estimated as 13% of sales. The depreciation and amortization expense is estimated at13.2 million dollars.
The EBT is projected at 11.215 million dollars. 42.5% tax rate was imposed on the EBT, this rate is mentioned in the case.Tax expense is projected to be 4.766 million dollars and after deducting the tax from earnings before taxes, the net income will be of 6.448 million dollars..........................
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