Case Analysis of Star River Electronics Ltd.”

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Case Overview:
Star River Electronics Ltd.

Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based in Singapore. It was founded as a joint venture between an Asian venture capital firm, New Era Partners and Starlight Electronics Ltd, UK. It has enjoyed a great deal of success in the past, due in large part to their excellent reputation for producing high-quality discs.

But due to recent emerge of Digital Video Disks (DVDs) Star River Electronics does need to face some problems. The conditions got worsen with the recent resignation of their former CEO. The new CEO Adeline Koh needs to face these problems. Digital Video Disks (DVDs) are expected to cut into the CD-ROM market in the very near future, but with 5% of their sales coming from this area. Star River needs capital expenditures to increase their capacity in this sector. To finance this expenditure, they can use either debt or equity. Also, a new packaging machine which would cut down on labor and overhead costs has been proposed, and Star River needs to know whether to approve the purchase now, or wait three years, where new equipment would have to be purchased to handle the projected growth rates. Finally, a weighted average cost of capital needs to be estimated for the firm, which will help to answer this question of whether to wait or buy this equipment at the present time.

In order to ensure the continuation and financial stability of Star River Electronics Ltd. chief executive officer Adeline Koh must convince the Company’s banker, to grant an extension on the Company’s loan as the Company stands to improve its performance through DVD production (and possibly, the purchase of new packaging equipment).

Here is the summary of financial questions facing Koh:

Historical performance of Star River Electronics Ltd. and provide some positive or negative insight on them. Financial Forecast of Star River Electronics Ltd.’s performance for next 2 years. Estimate Return on Book Asset and Equity and identify key assumptions of those returns. Estimate Star River Electronics Ltd.’s Weighted Average Cost of Capital and assess the Packing machine investment. Recommend about financial and operating changes.

Historical Analysis:
Ratio analysis:
For historical analysis we have provided a ratio analysis of 4 years and showed a trend for next 2 years on the basis of these ratios. The areas of ratio analysis are Profitability, Leverage, Asset utilization & Liquidity ratios. Table: Ratio Analysis of Star River

year199819992000200120022003
Profitability
Operating Margin (%)18.60%18.60%15.60%16.10%15%14%
Tax rate (%)27.90%26.10%24.70%22.60%21%19%
Return on sales (%)8.00%8.20%5.60%6.70%5%5%
Return on equity (%)16.70%16.90%11.70%15.20%13%12%
Return on assets (%)5.20%5.20%3.00%3.90%3%2%

Leverage
Debt/Equity Ratio1.131.211.992.22.633.029
Debt/Total capital (%)53.00%55.00%67.00%69.00%76%82%
EBIT/Interest (Times)2.452.481.822.181.871.72

Asset utilization
Sales/Assets65.20%64.00%57.20%57.40%53%50%
Sales growth rate (%)15.00%11.40%15.60%14.50%15%16%
Asset growth rate (%)8.00%13.50%29.30%14.20%25%25%
Days in receivables112.4115.6110.7121.1120.25123
Payable to COGS36.50%33.40%25.60%25.00%20%15%
Inventories to COGS69.10%72.10%115.80%119.30%143%166%

Liquidity
Current ratio0.760.770.80.880.90.955
Quick ratio0.410.410.310.340.290.255

Profitability Ratios:
Return on Equity
Return on Equity measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. Star River has had a decent return on equity...
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