Case Analysis of Kota Fibers, Ltd

Topics: Balance sheet, Asset, Generally Accepted Accounting Principles Pages: 12 (3460 words) Published: November 5, 2012
Case Analysis of Kota Fibers, Ltd



Executive summary

Kota Fibers, Ltd engages in yarn production in Kota Town, India. Textile millers use the yarn to make traditional dresses (saris) for women in India. Kota Fibers has been in operation since 1962 and has over the years faced an annual growth rate of 15 percent. This due to the rapid growth of the female population in India. In January 2001, the Managing director of the company Ms. Pundir realized that the company has been surprisingly hit by a cash shortage.

The company’s liquidity problems had a number of negative implications on its operations. Delivery of customer orders had to be postponed as it had to pay excise duty on a cash basis, before the loaded trucks can leave the company gates. In addition, its Banker, the All-India Bank had become wary of the company’s financial health owing to the high frequency of overdraft requests. Given this situation the bank’s lending officer demanded a financial forecast before he could advance further loans to the company.

From an analysis of the company’s financial statements it will look into main causes of the weak liquidity position that Kota Fibers is holding. It will also include current credit standing while comparing it to the projected results. It will look inventory turn around, sales and production and production increasing as a means of salvaging the situation. It is imperative for one to calculate the company financial ratio in order to determine the problems that this company is facing.

The recommendation offered will help Mr. Pundir to increase cash flow and be able to be a profitable company. This will include rejecting the 80 days net that has been proposed by Pondicherry Textiles as this will increase inventory and accept proposal by the Purchasing Agent and Transportation Manager that will help in reducing inventor thus increasing liquidity.

Overview of the company

Kota Fiber, Ltd was founded in 1962 as a small nylon fiber producing company in Kota, India. Right from the beginning, the company has maintained a high growth rate and success in this line of business. It sources raw materials from domestic market, which it processes into yarns and supplies them to domestic textile mills. These millers, in turn use the yarn to weave saris. Indian women wear the colorful saris as their traditional dress. The saris have a high demand in Indian given the high population of women which ranges at 500 million. On average, an Indian woman buys three saris a year. Given that each sari requires 8 yards of cloths, the annual demand for yards as faced by Kota fibers and its competitor’s amounts to over 12 billion yards of fabric.

Kota has a fairly stable market for its processed yarns. As such, the demand for yarn in each year follows a consistent pattern with fluctuations being predictable. This owes to the fact that as India’s population continues to grow so does the demand for saris. Moreover, the demand for saris gains a major boost from the hundreds of festivals observed by the Indian population and gets to an all time high during the most celebrated festival of the year, the Diwali. The implication is that Kota Fiber experiences peak demand of yarns at around late summer and early fall, when the celebrations take place.

After supplying yarns to millers, the latter sells them to cloth merchants, who have direct customer relations with the neighboring community. The merchants’ often offer credit to their customers, accumulates inventory prior to the peak season but maintains low inventory at other times. Kota and other suppliers compete for the market share through quality services, competitive prices and attractive credit terms. Ms. Pundir acts as the managing director of Kota Fibers. In addition, she is the principal owner of this family business together with 11 other shareholders.

Statement of Problems

The company faces a number of...
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