Question 1:

What evidence can you observe from analyzing the financial

statements that might signal the cash flow problems experienced in midyear 14?
There are many signals that reveal a problem in cash flow in mid-year 14 as
follow:
1. When looking at the current ration which is calculated by dividing
current assets by current liabilities it can be seen that it is fall from
0.30 to 0.14 which means current liabilities are rising faster than
current assets and this could indicate trouble (financial difficulty),
especially that creditors like to see a high current ratio. Because the
current ratio provides the best indicator of the extent to which the
claims of short-term creditors are covered by assets that are expected
to be converted to cash fairly quickly.
2. Quick ratio which shows the ability of the company to pay off shortterm obligations without relying on the sale of inventories (inventories
are the least liquid of a company current assets). A large decrease in
the quick ratio from 0.18 to 0.08 means that inventories would have to
be liquidated in order to pay off current liabilities.
3. Total assets turnover ratio which measures the dollars in sales that are
generated for each dollar that is tied up in assets. It can be seen that
the total assets turnover ratio is fallen from 0.7 to 0.6 which means
that FBN company is not generating as much business given its total
assets investment. (i.e. it uses its assets inefficiently).
4. Days receivables which represents the average length of time that the
company must wait after making a sale before receiving cash. 37 and

38 of days receivables indicate that customers on average are not

paying their bills on time. High levels of account receivables (as shown
on the balance sheet)which means that there more product sold in
credit than in cash and direct use of funds; causing high level of net
operating working capital (NOWC) which negatively affect free cash
flow (FCF) and stock price.
5. High level of inventory ( as shown on the balance sheet) add to net
operating working capital (NOWC) which negatively affect free cash
flow (FCF) and leads to lower stock prices.
6. Profit margin: the decreasing in profit margin ratio from 1.5% to (7.0%)
indicates inefficient operations of the company.
7. Leverage ratio: increasing in the leverage ratio over time indicate that
the company rely on debt (as shown on balance sheet and cash flow
statements)to finance its operations. Too much debt can be dangerous
for a company and its investors.
8. Decline in the long-term debt ratio from 81.5% to 0% means that FBN
Company paid off all of its long-term debt in year 14 which would have
a big impact on cash flow.
9. Decline in the return on asset ratio (ROA) from 7.5% to 0% means
inefficient management in employing the companys assets to make a
profit.
10.
Finally, when looking at the statement of cash flows, the most
noticeable is the negative change in cash flow.

Question 2:
either

the

Can FBN avoid bankruptcy during year 15? What changes in

design

or

implementation

of

FBNs

strategy

would

you

recommend?
I dont believe that the company can avoid bankruptcy during year 15 but
the following are some recommendation to improve its cash flow:
1. Put a strict system to collect accounts receivable.
2. Put a plan to manage the inventory in more efficient way.
3. Re-plan its financial strategy and asset acquisition policy.