Gemini Electronic – Financial Overview

Credit Memo

Gemini Electronic – Financial Overview

Gemini Electronics has recently undergone a financial review by Junior partner Sarah McIvor of Price Waterhouse  Coopers, in which the overall profitability, asset management, debt management and liquidity of the company have been addressed.  This analysis aims to identify key strengths and weaknesses of the company and offer recommendations for future improvements.

Reflecting upon Gemini’s balance sheet, large cash balances are a key standout.  The higher cash balance plays a role in Gemini’s increasing current ratio over the years. A higher current ratio generally reflects positively on a company as it shows their ability to pay back liabilities—essentially the company has more assets than liabilities.  A company that is able to pay back liabilities will remain on good terms with creditors and likely be able to obtain any needed loans for production and expansion as Gemini is looking to do.  Although the most recent current ratio for Gemini in 2009 (2.56) was below the industry average of 2.84, the company still has been steadily improving the ratio over time.

In terms of debt management Gemini is doing well overall as the company was able to lower both their debt ratio and debt to equity ratio. The debt ratio has remained under 1, which indicates that Gemini is holding more assets than debt.  A lower debt ratio is one indication that a company is in good financial position.  Gemini is able to maintain this low debt ratio due to their strict cash policy relating to maintaining large cash balances.  Additionally, Gemini maintains a 5,000,000,000 line of credit with Wells Fargo Bank which had to be 200 per cent secured by inventory and account receivable. Lastly, Wang’s desire to maintain control over his company is shown its lower shareholders equity as compared to the industry average (roughly 37% as opposed to 50%). This is yet another reinforcement that Gemini relies upon debt financing over strictly equity, but still shows the company has a healthy mixture of both.    

Gemini’s Cash Conversion Cycle is very impressive and well below the industry average of 192.  Nevertheless, their lower CCC is largely due to a lower inventory and the company’s more recent commitment to addressing accounts payable quicker.  Gemini’s accounts receivable is a sore spot within the financial statements.   It should be noted that Gemini initially employed a more lenient account receivable policy to entice potential retailers and remain competitive; however, now that they have established brand recognition and notable market share, the company should reexamine this policy (*see recommendations).  Moreover, for inventory purchased by Gemini, interest accrues on anything not paid within 60 days—so there are plenty of companies employing stricter account receivable policies.