Current Situational and Future Growth Opportunities Analysis
By: Robyn Berg, CMA (1072063)
MCL has been operating successfully for decades, but as times change, now they are finding themselves in a situation which requires in mediate action.
Even though MCL is still profitable, the ratios calculated (Appendix 1) indicate that the company is not very liquid, and is in risk of becoming insolvent.
CML’s liquidity ratios all fall below the commonly acceptable. For example, the quick ratio for 2011 is 0.11, when the acceptable is 1.
In addition, according to the leverage rations, CML has too much debt, and not enough equity. The Industry recommends a ratio of 2:1, with no more than one-third of debt in long term. When compared to the industry recommended levels, CML levels of debt are too high, they have 3.26 Total debt to equity ratio in 2011.
The company's profitability is decreasing. In 2011 only .013% of sales was kept as net income. This could mean that overhead costs are too high, and operational efficiency should be achieved. When compared all ratios year over year, the profitability has been decreasing. ROI ratio went from 12.77 in 2008 to 4.31% in 2011.
CML has been successful at doing what they do, and how they have been doing it, but they are aware that they need certain changes in order to keep up with the trends and the market. A full SWOT analysis has been undertaken, and can be found in appendix 2.
The board of directors have set the following goals:
• Increase revenues and gross profit margins, and decreasing expenses. • Required return 9%
• Increase the company’s after-tax earnings per share to at least $6.25 by 2014 and, at the same time, continue to repay Durand’s shareholder loans at a rate of $30,000 per month.
Current Earnings per Share
| |Target |2011 |2011 | |Net Income | 206,250.00 | 35,000.00 | 75,000.00 | |# of Shares | 33,000.00 | 33,000.00 | 33,000.00 | |EPS | | | | | |6.25 |1.06 |2.27 |
1. Product line diversification (please refer to Appendix 3 for financial Analysis) • Collectible plates
▪ Established customer market
▪ No presence in the secondary malls, mostly in major malls ▪ Would attract new customers to the store
▪ No inventory on hand or display space needed, as they are purchased as orders are placed by customers ▪ Low initial investment ($700 + $800 = $1,500)
▪ By adding this product, CML could increase revenues by $110,229 in 2014, increasing EPS by $3.34. o Cons:
▪ Requires special license from plate manufacturers
▪ During busy periods, handling the plate orders might create other customers discontentment due to delays in service. This might cause lost of sales and customers ▪ Needs special display, reducing space for other products (Opportunity cost of $580 per year ▪
▪ Would attract younger customers, who do not currently shop at CML, new demographic group ▪ Higher gross margin than Collectible Plates (50% against 30%), and there is no opportunity cost, as they will not affect selling space of other items ▪ Low initial investment ($1,000 + $500 = $1,500)
▪ By adding this product, CML could increase profit by $210,323 in 2014, increasing EPS by $6.37. o Cons:
▪ No returns to supplier are allowed, which creates a risk for CML of having unsellable inventory ▪ Might require increase...