This case highlights a number of problems which plague Sitara Energy Limited. The purpose of this report is to highlight those problems, explain the causes, provide justification for those causes and finally come up with feasible solutions. We will start off by first looking at the problems. Financial concerns:
It is quite clear from the case that the company is in deep financial turmoil. Typical of most Pakistani companies, Sitara Energy opted to raise necessary funds through short term borrowing. The incentive with short term borrowing is that the rate if interest applied is relatively low, as compared to long term debt. This is because long term loans have higher risk and are therefore subject to higher interest. However, Sitara solely relied on short term borrowing to raise funds and this is what leads to the current financial disaster. Let us take a look at some figures:
Finance cost295,903303,742324,180211,447142,01389,66228,921 Percentage Change-2.581-6.30453.3248.8958.38210.23
This table was made with the data available in exhibit 3. It should be viewed in conjunction to exhibit 3. As we can see, finance costs have risen sharply over the 7 year period. The average percentage increase in finance costs during this period was 51.714%. This proves that the company was solely focused on using debt to tap into additional resources. Exhibit 3 shows that finance costs increase in proportion to current liabilities. In addition, short term liabilities far exceed long term liabilities. Therefore, the company is raising funds through short term loans. These points are further reflected in the debt/equity ratio which shows unsustainable levels of debt accumulated in just a period of 5 years (2006-2010). High debt levels can only be justified if the company is aggressively expanding or...