AFIN832 Case study 1: Star River Electronics Ltd
AFIN832 Case study 1: Star River Electronics Ltd 1. Assess the current financial health and recent financial performance of the company. What strengths and/or weaknesses would you highlight to Adeline Koh? From the ratio of profitability, the company had about 18% on operating margin, 16% on ROE, 8% on ROS and 5% on ROA in both 1998 and 1999. However, there was a downturn trend in profitability ratio in 2000. This could be the result of price competition because of the introduction of DVD manufacturing in the market. The profitability ratios rose again in 2001. It shows that the company had ability to recover its ROE and operating margin. If ROA is sound and debt levels are reasonable, a strong ROE is a solid signal that managers are doing a good job of generating returns from shareholders' investments. Increasing sales and assets may also increase the debt of the company. Therefore, Star River needs more concern about the growth of profitability without taking too much debt.
We analysis the financial leverage of the company, it shows that the debt to capital ratio and debt to equity ratio had an upward trend between 1998 and 2001. The higher the debt-to-capital ratio, the more debt the company has. It shows that Star River is more prone to using debt financing. It may also show weak financial strength because the cost of these debts may weigh on the company and increase its default risk. The debt to equity ratio increased from 1.13 in 1998 to 2.20 in 2001. A high debt/equity ratio generally means that a company has been aggressive growth with debt financing. This can result in volatile earnings as a result of the additional interest expense. However, the interest coverage ratio of the company looks in good condition. When a company's interest coverage ratio is no more than 1.5, its ability to meet interest expenses may be questionable. Star River’s interest coverage ratio is always higher than 2, so it had the ability to meet the interest expenses.
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