"Importance of Cash vs Sales Growth"

Subject Company (SC) is founded in 1995 by Mr. Benard Wong. The firm is in the aviation industry.

Summary:

SC registered an average liquidity rating of LR4.2 (LR1= excellent, LR6 = poor). This may reflect a biased liquidity position, as the quality of current assets; particularly "other current assets" is very high in its balance sheet.

Despite registering an increase in revenue, its cashflows posted a steep decline of 58.82%, where the latter constituted only around 0.58% of total assets during the year. The decline in cashflows stemmed from various reasons, such as the steep decline in the creditors' accounts where SC may have paid back as well as cashflows that were tied to non-cash items. Despite a rise in sales, the total cashflow existing in the firm is still insufficient to meet the working capital requirements and short-term liability exposure in absolute terms. Within the cashflow from operations, SC has around $186m in its other current assets where the related parties' transactions form 60% of the other current assets which amounts to an increase of $112m in 2005. Further verification from the Management is required due to this relatively large exposure.

In an operational viewpoint, the debtors are repaying faster as compared to the previous year which is a good sign however, SC is paying their creditors much faster than they collect; which could result in loose management of cashflow.

SC's balance sheet is somewhat satisfactory because under a harsh condition of sales decline of 5-30%, SC is able to survive the drop in revenue without requiring additional financing. However, its cashflow position is very much affected. This is largely attributed to its relatively low current cashflow position.

Summary: Overall liquidity strength
 
                                                                                       2005                                2004
                                                                 Liquidity                  Credit Ratios                Liquidity

Rating

Current Ratio (x)                                        5.00           1.13                                  1.01       5.00
Quick Ratio (x)                                           4.00           1.13                                  1.01       4.00
Average LR Score (single-year)              4.2                                                                      4.2

Wtd Average LR Score (2-years) 4.2                             LR1 = Excellent liquidity - LR6 = Poor liquidity

Table A                           2005                        2004              Notes      2005       2004      Change(%)
Cash                       8,736,528.00       21,215,468.00           1          1.11%     3.10%      -58.82
Trade debtors    381,756,556.00    374,582,054.00          2         48.63%   54.74%        1.92
Stocks                           0.00                       0.00                     3           0.00%     0.00%
Other CA            186,068,758.00      74,489,251.00          4           23.70%  10.89%    149.79

1           Lower proportion of cash to assets compared to previous year.

2-4        Non-cash assets formed around 72% of assets, worth a total $567,825,314 in 2005. There is a high level
             of other current assets in the balance sheet. These are mainly transactions arising from related party
             transactions (60% of other current assets). Further verification is needed here because of its relative
             large exposure. The total amount of related party transcations amount to 13.34% of total amount to
             13.34% of total sales in 2005 doubled from 6.92% in 2004.

There was a major deterioration in the firm's overall cash balances in absolute terms, but this did not somehow lead to lower sales compared to the previous period.

A lower proportion of cash to total assets was achieved during the year - the firm generated lower level of cash for every dollar of assets being invested.

From the table above, it can be seen that a lower proportion of trade debtors exist in its balance sheet for the year - fewer debtors are being generated as a percentage of total assets, compared to the previous period.

Meanwhile, there was an unchanged position in terms of the proportion of inventories relative to total assets of the firm.

Note: Figures generated from the system may differ from published statements due to adjustments and assumptions made to the underlying variables. The operating cashflows stated herein are an estimate only.

Cashflow Statement (excerpts)              2005                Key comments for the year
Profits for the period                         9,304,335.00                  SC made profits
Depreciation                                  16,077,692.00
Increase in debtors                         -7,174,502.00             Cash tied up in customers
Unchanged stock levels                                0.00            No cash tied up in inventory
Increase in other current assets    -111,579,507.00    Cash tied up in non-core current assets
Decrease in trade creditors            -96,499,738.00      Amount of cash paid out for supplies
Unchanged overdraft levels                            0.00       No changes in amount of overdrafts
Increase in Other CL                       75,786,942.00     Credit extension provided by non-trade

Cashflow from Operations           -74,084,778.00                    **Warning**
                                                                                   Overall decline in cashflows from
                                                                                            core operations

Operational diagnosis: Operating Cash Cycle Diagnosis

There is a deterioration seen in the cash cycle of the firm, with longer collection days
experienced as compared with payment and inventory days in total.

                                                                               2005                 2004                     Notes
Accounts Receivable Turnover (x)                      3.96                  3.09                         5
Average A.R Collection (days)                          92.28              118.27                         6
Average Inventory Turnover (x)                            0.00                  0.00                          7
Inventory Days (days)                                           0.00                  0.00                          8
Average Creditors Turnover (x)                           7.77                  4.32                          9
Average Payment Days (days)                          46.97                84.51                       10
Cash Cycle (days)                                              45.30                33.77

The negative contribution from operating cashflows could be partly explained by:

Note 5    Implies that the firm operates on a cash basis with some improvement or that its extension of credit
              and collection of accounts receivable is more efficient.

Note 6    An improved turnaround time for debtors to get converted into cash

Note 7    Unchanged inventory turnaround time – stable inventory movements.

Note 8    Unchanged leadtime for stock to cash conversion over the year

Note 9    The firm may have decided to hold on to its money longer or that it is having greater difficulty paying
              creditors. However, the firm may be losing customer discounts if payments not prompt.

Note 10    **WARNING**
               Shorter payment days to suppliers vs previous year - need to manage trade cycle more carefully.

Stress testing on cashflows on operational needs

**Actual Figures Below           Drop in revenue base - impact on cashflows and profits
                             2005                            5.00%                 10.00%                   30.00%
Sales           1,495,844,832.00
Operating        221,811,806.00
Profit after tax   49,304,335.00
                                                                                Amount affected
                                                          74,792,241.          149,584,48             448,753,44

Impact on net profits (new)               -25,487,906          -100,280,14           -399,449,11
Impact on net profit margin (new)        -1.70%                 -6.70%                -26.70%
Impact on total cashflows                 -66,055,713          -140,847,95             -440,016

Applied against existing     221,811,806.00
operating expenses level   221,811,806.00

Net cash balance / (deficit)                -287,867,519.       -362,659,761         -661,828,72
                                                         **WARNING**       **WARNING**      **WARNING**
Availability of funding from key sources

Trade debtors       381,756,556.00      Note: Quality of current assets need to be assessed by the user  
Stocks                                 0.00             of this report. For instance, how liquid are the inventories,
Short-term loans   142,715,467.00             how saleable and the quality of its debtors - can this be
Long-term loans      68,778,764.00             reasonably collected and to what extent this can be
Total                     662,029,551.00            financed by the banks or financial institutions.

                                               Drop in revenue base - impact on cashflows and profits

                                                                    5.00%                  10.00%                  30.00%

Additional funding required to support        0.00                       0                           0
working capital needs (estimated)

% of total assets                                             0.00%                 0.00%                   0.00%
% of total equity                                              0.00%                 0.00%                   0.00%
% of total sales                                               0.00%                 0.00%                   0.00%

Key comments from the what-if

Despite stress-testing the revenue flow of the firm across values between 5% to 30%, the firm may not require additional funding as its existing assets and financing facilities should be adequate to cover the deficit. However, the quality of assets and readiness of the banks to be liquidated and to continue its financing facilities respectively need to be ascertained before conclusively assert this view.