"Sales down, but Cash is in the game"

Subject Company (SC) is founded by Mr. Potter Tay in 1998. SC is in the construction business around Asian Pacific with an employee size of 50.

Summary:

SC registered a relatively high liquidity rating of LR2.0  (LR1= Excellent, LR6= Poor), underscored by a very high level of cash forming part of its current assets.

Although there is a major drop in sales of 19.34%, SC is still able to experience higher cash balance which constitutes 94.15% of total assets. Non-cash assets thus forms a small part of its balance sheet, reflecting a sound liquidity condition. However, comparing its cashflows from operations against its total level of short-term liabilities, it is noted that there is insufficient level or gap of around $13.8m. While such gaps are typical in the construction industry, it appears unlikely that this will pose a concern for creditors, as its total cash balances , derived from financing and assets, are more than adequate to cover any working capital requirements.

From an overall operational viewpoint, faster payment from debtors is recorded with a comfortable buffer period to pay off its creditors during the year. In this instance, while SC is receiving cash faster than it pays out to creditors (which is a good sign for the company), SC is also paying off the creditors more quickly compared to the previous year. Some may argue however, that if SC pays off their creditors earlier, they may get discounts from their suppliers which will in turn improve their overall gross margins.

SC's balance sheet is strong because under a harsh condition of sales decline of 5-30%, SC is able to survive the drop. This is largely attributed to its very high cash balance, as derived from its various sources such as operations, investing and financing.

     Summary: Overall liquidity strength                           2004                          2003
                                                                           Liquidity              Credit Ratios               Liquidity

Rating
Current Ratio (x)                           2.00         2.06                         1.85         2.00
Quick Ratio (x)                             2.00         2.06                         1.85         2.00
Average LR Score (single-year)        2.0                                                         2.0

Wtd Average LR Score (2-year) 2.0               LR1 = Excellent liquidity - LR6 = Poor liquidity

Based on its liquidity ratings, it can be suggested that a high degree of liquidity exists in the balance sheet with significantly high level of liquid assets providing more than adequate.

Despite experiencing a major sales downturn, the firm is able to post higher cash position compared to the previous period.

SC posted revenue of  58,932,469 compared to 73,059,700 in 2003. This was a weakened position compared with 2003, registering a change -19.34%.

On the other hand, SC posted an improvement in its cashflows by 7.51%, making its total cash levels forming a very high portion of its revenue stream of circa 85.87% compared to 64.43% in 2003.

The level of operating cashflows may not be adequate to cover its short-term liabilities-reliance on other forms of financing is necessary to support its working capital requirements.

1 higher proportion of cash to assets compared with previous year.
2-4 non-cash assets formed around 2% of assets, worth a total $1,062,812 in 2004

There was very moderate cash growth experienced by the firm in absolute terms that was also characterized by lower sales compared to the previous period.

A higher proportion of cash to total assets was achieved during the year - the firm generated higher 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)                2004         Key comments for the year
Profits for the period                       4,283,529.00       SC made profits
Depreciation                                              0.00 
Decrease in trade debtors             17,285,396.00       Amount customers paid up
Unchanged stock levels                              0.00       No cash tied up in inventory
Increase in other current assets          -28,557.00      Cash tied up in non-core current assets
Increase in trade creditors                 511,885.00       Credit extended for supply acquisition
Unchanged overdraft levels                          0.00       No changes in amount of overdrafts
Decrease in Other CL                  -10,773,037.00       Payments to other non-trade creditors
Cashflow from Operations         11,279,216.00       Overall increase in Cashflow

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.

The positive cashflow contribution from its operating activities can be partly explained by:

Note 5   **WARNING**implies that the firm operates on a cash basis with little or no improvement or that its extension of credit and collection of accounts receivable is less efficient

Note 6  **WARNING** Longer period of collecting payments from debtors - cash tied up in debtors and may affect liquidity position

Note 7  Unchanged inventory turnaround time - stable inventory movements

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

Note 9  **WARNING** The firm may have decided to pay off faster on its own accord or that creditors are demanding faster payments

Note 10  Longer payment days to suppliers compared to previous year

Stress Testing on Cashflows on operational needs

**ACTUAL FIGURES BELOW               Drop in revenue base - impact on cashflows and profits
                                          2004                          5.00%               10.00%               30.00%
Sales                    58,932,469.00
Operating               4,240,358.00
Profit after tax        4,283,529.00

                                                                                                         Amount affected
                                                                             2,946,623.45          5,893,246.         90 17,679,740.
Impact on net profits (new)                           1,336,905.55         -1,609,717.             -13,396,211
Impact on net profit margin (new)                        2.27%                 -2.73%                   -22.73%
Impact on total cashflows                               47,657,977.          44,711,354.             32,924,860.

Applied against existing      
operating expenses level    4,240,358.00

Net cash balance / (deficit)                          43,417,619.55      40,470,996.10          28,684,502.

Availability of funding from key sources

Trade Debtors       952,997.00              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             0.00              how saleable and the quality of its debtors - can this be
Long-term loans              0.00              reasonably collected and to what extent this can be financed
Total                     952,997.00                  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.