A CASE STUDY ON
July 6, 2012
The case subject revolves around MiniScribe, a manufacturer of disk storage products that is under the watch list for rumors directed to the firm’s problems with cash flow and inventory. The objective of the report is to come up with a BUY OR DON’T BUY recommendation for Alexander & Ferris using the available financial and qualitative information.
The analysis was conducted by deriving additional information from available financial data and proceeding with an interpretation of the results in light of qualitative information. The group developed decision lists for a BUY or DON’T BUY recommendation and these were compared against relevant factors that assess the profitability, efficiency, and sustainability of a company.
Following a thorough analysis of the financial statements, financial ratios, and industry trends, the decision is to proceed with a DON’T BUY recommendation. On the evaluation of profitability, expenses are increasing at a faster rate than sales, and cash flow generated by operating activities is steadily declining, even reaching negative values towards the third quarter. MiniScribe’s position on research and development investments, while it maintains its good reputation in the stock market, is too high to maintain considering the firm’s depleting cash resources. As expenses increase, problems in cash flow and asset management become more and more significant. MiniScribe’s resources are locked in rapidly increasing inventories and A/R balances as indicated by increasing turnover days. Inefficient inventory management and long collection periods lead to more doubts on MiniScribe’s ability to remain liquid. Further pursuing this analysis, liquidity is a prime concern because MiniScribe has been resorting to short-term borrowings and debt to address its cash flow problems. With decreasing cash balances and increasing current liabilities, MiniScribe’s uncontrolled short-term debt raises uncertainty in the company’s sustainability.
MiniScribe must be placed on a DON’T BUY recommendation because its current position does not pave way for continued high earnings for investors. I. POINT-OF-VIEW
The analysis of Miniscribe Corporation’s financial performance will be taken from Paula Perry’s perspective as a research analyst for Alexander & Ferris, a brokerage firm.
II. CASE CONTEXT
While once a promising investment in its early life, Miniscribe is rumored to be experiencing cash flow and inventory problems after a management takeover and restructuring.
Brief History of Miniscribe:
1. Entered the market and posted soaring revenues; Was once Wall Street’s favorite 2. Lost its momentum and severely went down when its customers (IBM) started producing their own disk-drives 3. Invested in R&D which earned them a good reputation and stock prices that continuously increased 4. The state of the market is looking bleak and MiniScribe’s financial statements show that the company is not performing well 5. Future plans of MiniScribe: diversify products to infiltrate new market segments Should Alexander & Ferris, a brokerage firm , continue to retain Miniscribe on its “Buy” Recommendation List?
III. PROBLEM DEFINITION
The report intends to come up with a BUY or DON’T BUY recommendation for Alexander & Ferris, as supported by the group’s in-depth analysis of available quantitative and qualitative Information.
The analytical methodology requires the following:
1. Definition of the criteria or factors for consideration for the recommendation; 2. Organization of available data, which includes the following: 1. Historical recording of events that transpired from 1980-1988 comparing company and industry reviews, 2. Preparation of Financial Statements (Income Statement and Balance Sheet for 1st-3rd Quarter of 1988); 1. Extraction of additional information...
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