Analysis of Ceres Gardening Company:

Question 1A: The company’s profits have increased by ~30% from 2002 to 2006(E). How much of the
profits estimated for the year 2006(E) will translate to the 'cash flow from operations' for the same
year? Which of the three categories in the cash flow statement has contributed majorly to the
decrease in the 'change in cash' by the company from 2003 to 2006(E)? (1+1 marks)
(Note: 'Change in cash' is the same as 'Total cash generated'. The (E) beside a year indicates that the
figures are expected in the future, i.e. the case study analysis is taking place before the year.)

Solution 1A: So calculate the amount of profit estimated for year 2006(E), we can use the cash flow
statement data for year 2006(E).
Net income for 2006(E) = $1534 thousand and Operating Cash Flow = $226 thousand

Therefore, $226 thousand of the estimated profit will translate to the cash flow from operations.

Out of the three categories of the cash flow statement i.e operating, investing and financing cash flow
the majority contributor to the decrease in ‘change in cash’ is Operating Cash Flow Category.

Question 1B: What is the trend in cash flow from 'operating activities', 'investing activities' and
'financing activities' over the years? Identify at least one reason for the increase/decrease in each of
the three categories of the cash flow statement. Explain your answer. (Note: Trend indicates whether
the numbers are increasing/decreasing over the years) (2+3 marks)

Solution 1B:

Trend in Cash Flow:

(i) Operating Activities 2,019 838 250 226

As it is evident from the cash flow statement the trend is Decreasing.

Reason: The Primary reason for this significant decrease is due to increase in the Account
Receivables, i.e more sales are done on credit which reduces the cash available foe
operations.

(ii) Investing Activities:

The trend here is also

-2,135 -1,836 -1,215 -1,398
Investment in PP&E -835 -734 -1,215 -1,398

Investment in Land -1,300 -1,103 0 0

 decreasing in the investing activities.
Reason: There has been the investment made in PP&E and also some investment made in
land as well result in decreasing trend in cash flow in investing activity.

But the trend is less negative dure to decrease in the investment in the land.
(iii) Financing Activity: 953 1,274 1,306 969

The trend here is increasing initially and then decreasing in year 2006(E).
Reason: The increase in financing cash flow from 2003 to 2005 can be attributed to higher
debt issuance and decreasing after that dure to debt retirement.

Question 1C: Analyse the expected cash flow profile of the company for the year 2006(E) and
comment on any 3 of the following factors: 'self-financing of investments', 'funding of investments',
'cash position of the company' and 'free cash flow'

Answer: Based on the given chart below is the analysis for 'self-financing of investments', 'funding of
investments', 'cash position of the company’

(I) Self-financing of Investments: Self financing of investment refers to when a company is generating
enough cash flow from it operations that It can fund its investing activities.

As per the given Chart Cash flow from the operating activities is positive but not that much as it from the
cash outflow from operating activities. So we can say that operations are generating cash but not
enough that it can Self Finance.

(ii) Funding of Investments: It means that the company’s money into the investment activities whether it
is self-financing, debt or equity.

From the chart it is evident that there is cash outflow from investment activities means company is
making substantial investments. As we see on the previous point it is not Self Financing so it is from
 external fundings.

(iii) Cash Position of the Company: It means the amount of the cash available at the end of
period.

The chart shows the positive cash at the end this means that company ends its period with
some cash in hand

Question 2A: Calculate the operating working capital of Ceres Gardening Company for 2002–2006(E)

Solution: Operating working capital = Accounts Receivable + Inventories − Accounts Payable

Year 2002 2003 2004 2005 2006
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Operating Working Capital 4,540 4,227 5,123 6,917 8,894

Question 2B: Calculate the operating working capital/sales ratio of Ceres Gardening Company for 2002
to 2006(E).

Solution: Operating Working Capital/Sales Ratio:

Year 2002 2003 2004 2005 2006

Operating Working Capital 4,540 4,227 5,123 6,917 8,894
Sales 24,652 26,797 29,289 35,088 42,597
Ratio 0.184162 0.157742 0.174912 0.197131 0.208793
Year 2002 2003 2004 2005 2006
Inventories 3,089 2,795 3,201 3,291 3,847
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DIO 55.1032494 47 49 42 40

Question 2C: Calculate the DIO, DSO and DPO for the company from 2002 to 2006€

Solution:

Days Inventory Outstanding (DIO): Inventories/Cost of Goods Sold (COGS) * 365

Days Sales Outstanding (DSO): Account Receivable/Sales * 365

 Year 2002 2003 2004 2005 2006
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Sales 24,652 26,797 29,289 35,088 42,597
51.598868
DSO 2 60 85 107 124

Days Payable Outstanding (DPO): Accounts Payable/Cost of Goods Sold * 365

Year 2002 2003 2004 2005 2006

Accounts Payable 2,034 2,973 4,899 6,660 9,424
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
36.283589
DPO 9 50 75 85 98

Question 2D: What is the implication of the long credit period given to dealers by Ceres Gardening
Limited on its working capital? Explain your answer by specifying at least one reason.

Answer:
Implication: The long credit period has significantly increased the company's Days Sales Outstanding
(DSO), meaning it takes longer to collect cash from customers. This results in more money in accounts
receivable, directly affecting working capital.

Explanation: From 2002 to 2006(E), accounts receivable increased from $3,485 thousand to $14,471
thousand. This rise means more funds are tied up in receivables, reducing cash available for operations,
increasing operating working capital, and potentially causing cash flow issues.

Question 3: Prepare and present the economic balance sheet for Ceres Gardening Company and
calculate the capital employed by the company.

At December 31 2002 2003 2004 2005 2006E

Capital Employed

Operating working capital 4540 4227 5122 6917 8894

Accounts Receivable 3,485 4,405 6,821 10,286 14,471

Inventories 3,089 2,795 3,201 3,291 3,847

Other Assets 645 645 645 645 645

Plant, Property, & Equipment (net) 2,257 2,680 2,958 3,617 4,347

Accounts Payable 2,034 2,973 4,899 6,660 9,424

 Land 450 1,750 2,853 2,853 2,853

Total Capital Employed 13,761 18,044 23,417 27,609 35,056

Capital Invested

net debt 2,868 3,211 4,433 5,696 7,175

Cash 705 1,542 1,818 2,158 1,955

Current Portion of Long-term Debt 315 352 525 730 649

Long-Term Debt 3,258 4,400 5,726 7,123 8,480

Shareholder’s Equity 5,024 6,091 7,146 8,336 9,563

Total Capital Invested 13,761 18,044 23,417 27,609 35,056

Question 4A: Calculate the key profitability ratios for the years 2002 to 2006(E)

Solution: The key profitability ratios are Variable Margin (as a % of sales), Operating Margin, Return on
Equity and Return on Average Capital Employed.

(I) Variable Margin: (Sales – COGS)/Sales * 100

Sales 24,652 26,797 29,289 35,088 42,597

Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Variable Margin (%of sales) 17 19 18.6 18.5 17.6

(II) Operating Margin: Operating Income (EBIT)/Sales Revenue

Earnings before Interest & Taxes

1,641 2,338 2,408 2,836 3,018
Sales 24,652 26,797 29,289 35,088 42,597

Operating Margin 0.07 0.09 0.08 0.08 0.07

 (III) Return on Equity (ROE): Net Income/Shareholders Equity

Net Income 1,191 1,293 1,279 1,488 1,534

Shareholders Equity 5,024 6,091 7,146 8,336 9,563
ROE 0.237062 0.2122804 0.1789812 0.1785028 0.1604099

(iv) Return on Average Capital Employed (ROACE):

Earnings Before Interest and Taxes (EBIT)/Average capital employed

Average Capital Employed:

Capital Employed (Beginning of Year) + Capital Employed (End of Year)/2
Capital Employed: Total Assets - Current Liabilities

ROACE:

Average Capital Employed 8,282 9,387 11,682 14,166 16,752

Earnings before Interest & Taxes
1,641 2,338 2,408 2,836 3,018

ROACE 0.20 0.25 0.21 0.20 0.18

Question 4B: What is the trend in RoE from 2002 to 2006(E)? List down at least one reason for the
increase/decrease in RoE by assessing the drivers of RoE. Explain your answer in not more than 30
words.

Answer: Trend on Return on Equity 0.24 0.21 0.18 0.18 0.16 RoE

Reason: As it is evident the RoE is decreasing from 2002 to 2006. Increasing capital employed and rising
equity have diluted returns, despite growing net income. Thus this decline reflects a reduction in the
efficiency with which the company is using shareholders' equity to generate profits.

Question 4C: What is the trend in RoACE from 2002 to 2006(E)? List down at least one reason for the
increase/decrease in RoACE by assessing the drivers of RoACE. Explain your answer in not more than
30 words.

Answer: Trend in RoACE

RoACE 0.20 0.25 0.21 0.20 0.18

ROACE decreased from 0.20 in 2002 to 0.18 in 2006E. This indicates a declining efficiency in generating
profits relative to capital employed over the period. Capital employed grew faster than the increase in
gross profit, reducing ROACE. Despite rising profits, the proportional growth in capital employed
diminished ROACE.
Question 5: List down at least two pros and two cons of the GetCeres program for Ceres Gardening
Company. Would you recommend continuing with the program? Justify your answer.

Pros of the GetCeres Program:

Increased Sales Potential: The program can help expand market reach and drive higher sales volumes,
contributing to revenue growth.
Enhanced Customer Engagement: It improves customer interaction and loyalty through targeted
marketing and personalized experiences.

Cons of the GetCeres Program:

High Costs: Implementing and maintaining the program can be expensive, potentially affecting
profitability if not managed well.
Complex Integration: Integrating the program with existing systems and processes might be challenging
and resource-intensive.

Recommendation: Continue with the Program.

Reason: Despite the cons, the benefits of increased sales and enhanced customer engagement can
outweigh the costs. The program should be evaluated periodically to ensure it delivers expected returns
and adjustments made as necessary to optimize performance.