What Are the Financial Strengths and Weaknesses of Star River?

1. What are the financial strengths and weaknesses of Star River?

By looking at the quick ratio and current ratio, Star River has been doing poorly over the pass four year. Current ratio is a measurement of how likely a firm is able to clear its debt within the next 12months. A current ratio of 2-3 is generally acceptable. When we look at the current ratio of Star River, it raises from 0.76 to 0.88 from 1998 to 2001, which is way below the minimum threshold of 2. When we look at the quick ratio of the firm, it decreases from 0.41 to 0.31 in the past four years. First, the ratio is below 1, which indicating that the firm is having trouble turning asset into cash to pay for its current liability. Secondly, the decrease in the quick ratio indicates that Star River is having trouble turning products into cash.

One reason that Star River has both low quick ratio and current ratio is because the emergence of DVD, which result decrease CDR sale. This is also reflected when we look at the inventories to COGs. In 1998, the ratio is 69.1%, while in 2001, the ratio is 119.3%, when we invert that to get the inventory turnover and the average day of turnover, its 1.45 and 252day in 1998 and 0.84 and 434 day in 2001 respectively. We can clearly see that Star River has retention of stocks and trouble liquefying it.

When looking at operating margin, ROS, ROA, and ROE, these ratios have decrease over the four year period, indicating that the firm has decrease in profitability. However, the slight increase between 2000 and 2001 may be due to the new product line of DVD, which may provide solution for the firm’s future.

In addition to the weaknesses above, we also see that the debt/equity ratio is 1.13, 1.21, 1.99, and 2.20 for 1998 to 2001 respectively. The increase in ratio indicates that the firm is more depended on debt to survive.

Although Star River has so many weaknesses, it still has some strength which may help the firm. First of all, the firm has been a well establish and known company in the CDR industry, which may have more experience in producing digital storage devices. Secondly, although the company’s profitability is decrease, it is still making profit. Finally, between 2000 and 2001, after the introduction of a new DVD production line, the company seen to regain some of its profitability, this may be a way for Star River to request an injection of fund.

2. What are the financial needs of the firm in 2002 and 2003? Develop pro forma financial statements

Financial statement: see attached excel sheet

Assumptions: annual growth of sale is 15%; operating expenses, account receivable, inventory, account payable, short term debt are dependent of sale, all external source of funding is debt.

The current ratio from the forecast in 2002 and 2003 is 0.74, and 0.77 respectively. The ratio has