The current ratio of the firm had dropped to the same all-time low level in 2001.  This can be explained as the current liabilities had exceed the past year level by at least 100% that makes the increase in current assets futile.  In effect, the firm had to intensify its gearing dependence (see figure) to mitigate short-term financial weakness (1999 p. 229) as a result of current liabilities exceeding current asset double of the latter.  On the other hand, the cause of seemingly undesirable level of current ratio could be a positive situation to the firm like efficient conversion cycle of current assets through just-in-time in operations (p. 310).            

            The liquidity ratio dropped from the all-time highest recorded last year at 0.42 to 0.17.  The high level of current liabilities resulted high gearing ratio and suggested that the firm must rely to the banks to finance short-term debts.  To do this, the firm must operate under minimum level of liquidity ratio to secure loan agreement (p. 777).  In effect, even though it has relative disadvantage of slow asset conversion, it is protected by banks to offset liquidity shortages.


      


            Due to the firm reaction to current and liquidity ratios, its solvency is in relative stable level, although the figure shows all-time-high.  Technically, it is solvent because it is backed-up by banks and other creditors.  Thus, when a creditor claims the amount due at a specific period (1996), the firm can settle such debts on time.  In effect, its debtor reputation is saved simply by structuring its financial resources that is, looking bad in the eyes of banks but fair performer in the eyes of collecting creditors.


            The asset cover is the reflection of the aforementioned analysis and verifies the firm’s reliance to banks and other third party creditors.  As suggested, this provides rationale for a high gearing ratio and indicative of the long-term solvency standing of the firm.  However, high reliance to debt financing as equity financing is insufficient connotes higher financial risk (p. 318).  This premise is explained by paying interest to outside creditors even though the firm is not earning.  The fixed commitment is a huge pressure to the cash flow necessary to execute operational objectives of the firm that subsequently supports the strategic ones.  As a result, risk of loss not only to dividends but total investment would be apparent.


 


            In reference with the cash flow statement, it is showed that the effects of high gearing ratio does not yet took effect due to its long-run nature to solvency.  By using the information, the action of the firm to borrow outside funds was its strategy to finance the shortage of capital financing in its acquisition and disposal endeavors. As its assets could not support this feat due to minimal asset cover, it opted debt financing instead.  However, it is expected to perform well in the future in order for payment of interest would not be jeopardized and the estimated/ planned gains in acquisition/ disposal should be realized.


 


            The all-time low shareholders liquidity ratio also supported the external borrowing.  Internal funds was spent to drastically increase resources like the almost 150% increase in labor force possibly to be deployed in the newly acquired businesses.  In effect, the remaining expenditures were directed from outside creditors.  Due to this, the firm conceded high financial risk in the future, and whether it performs good or bad, the interest and principal should paid out.  Since its internal financing entities are almost insolvent, the advent of bad performance will ultimately lead to bankruptcy filing or selling out its remaining assets.   


 


            The intensified internal funding was also reflected in shareholders fund per employee ratio and asset per employee ratio that posted their all-time high.  The firm is really enthusiastic about financing a certain business prospect that it was willing to exhaust its internal funding and be submerged to risky outside financing to establish the dealing.  Working capital per employee, however, indicated the lessened liquidity of the firm due to drastic investment built-up.  Implications such as human resource training and motivation become critical to be able to obtain the optimal value from the acquired investments.  At all aspect of the business, it is seemingly surrounded of all types of risks from several stakeholders.  The financial figures could show how the firm drifted to this situation not delving to impose investment restrictions for smooth flow of corporate change.  It can catch a school of big fish but its unfamiliarity with the size of the sea installs the threat that it could be taken away by tidal waves.


 


            To illustrate this possibility, the huge labor force expected to boost sales had only caused the firm to arrive at all-time low on profit per employee at the expense of all-time high average remuneration per employee.  This has dualistic approach.  It could suggest adjustment period for employees to learn the job or the ineffectiveness of acquired assets.  EBITDA and profit margin, as a result, was in all-time low that was possibly the effect of increased remuneration for additional employees.


 


            The firm’s optimism of its future performance had yet to be realized as the bulk of new investments did not reflect in the return on shareholder’s funds, capital employed and total assets but even marked their all-time low.  Interest cover and debtor turnover (although collection is in all-time high is still insufficient) were also low indicating the inability of internal resources to pay debts.  However, it remained conservative when it comes to ownership as stock turnover maintained its stability.  In this hard situation, the aid of outside creditors (most probably banks) was of great use to maintain creditor payment level despite of poor operational performance.  The fixed assets turnover also showed that the firm invested in new buildings and land that were not yet able to realize its contribution. 


 


            With this forgoing, the firm and its owners have really an optimistic stance for the firm’s future.  The high risk of debt financing, however, entails realizing this positive prospects and efficiently manage the still “sleeping” resources.  There is also a call for human resource motivation from the management as additional workforce requires mentoring and training for effectiveness.                   


Bibliography


 



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