Financial analysis Case Study Example | Topics and Well Written Essays - 1250 words

Financial analysis - Case Study ExampleThere are heterogeneous as to why a firm can be profitable and experience interchange range problems at the same time. This case study will discuss the reasons as to why the firm is experiencing nifty problems and provide recommendations on how it can improve its coin proceed. Cash flow is the ability of a political party to meet its financial obligations. A negative cash flow prevents a bon ton from meeting its debt payments similar in the case of drapery Chemicals. It is important for Cape Chemicals to analyze the reasons leading to the negative cash flow while still reporting an increment in the profits. By doing this, it will be able to deject its debt symmetry to enable it acquire long term borrowing. The analysis will also be aimed at acquiring a positive cash flow and positive profits. Reasons for the negative cash flows at Cape Chemicals The profit for the company has change magnitude significantly over the last three year s due to the growing in the revenue obtained from the increase in sales of chemicals. The new product lines have led to change magnitude production and hence increased sales and revenues. However, despite of the increase in profit, the company has negative cash flow due to increase dependence of loans for its capital expenditure. This means that the cash obtained from the profits and other billet income is used in capital expenditure. That is, the company uses all of its liquid cash to pay for loans used in capital expenditure leaving it with a negative cash flow. Cape Chemical is a company which deals with the distri exactlyion of dry and liquid chemicals. The main reason as to why the company is profitable but broke is because the company has been servicing loans or purchasing capital equipments. Cape Chemicals has intensely used its cash flows to purchase capital equipments in its bid to add new product lines for the company. The need to increase the substance of the company has seen the company use most of its cash to purchase new equipments a situation which has stagnant its cash flows. An additional chemical product line for the company requires a large sum of cash which has drained the firms cash supplies. The company has also been serving loans (long term loans) which have been borrowed for the capital requirement reasons. Cape Chemicals used to borrow for its capital requirement until 2006 when the company had reached its bank borrowing limit. The increased borrowing has led to an increase in the debt ratio of the company as shown below Debt ratio 2005 2006 2007 45.45% 58.4% 71.5% The increase in the debt ratio over the three year period is an indication of increase borrowing. The close the ratio is to 100%, the higher is the company depended on borrowings and loans making leading to increase in the total debts and a lessening in the total assets. Capital expenditures are subject to depreciation which reduces the net income and subsequently the positivity of the company. The depreciation expenses associated with the capital expenditure of Cape Chemical therefore leads to the negative cash flow experient in the company. Poor collections practice in the company is also responsible for the negative cash flow. For example, jibe to Stewart, the liberal credit policy in the company had led to increased accounts receivables which then led to the reduction in the