Star River Electronics Essay

1033 words - 5 pages

Star River Electronics LTD: Case Analysis
Star River Electronics LTD: Case Analysis

Executive Summary

Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based in Singapore founded from a joint venture between Asian firm New Era Partners and Starlight Electronics Ltd, UK. Star River is recognised in the CD-ROM manufacturing industry for producing high quality disks. A study however showed that DVD’s would bypass CDs within six years. Despite volume sales for Star River growing at a rapid rate, unit prices have declined due to price competition of substitute storage devices such as DVDs. DVDs have 14 times more storage capacity than CD-ROMS therefor CEO Koh ...view middle of the document...

Exhibit 1 shows a significant drop in operating margins in 2000 which seems to be a result of 21% increase in production costs and 20% increase in admin expenses. One of the main issues seems to be a 95% increase in inventory, which appears to have been financed through debt as the debt/equity ratio increased from 1.13 to 1.99 over the three years.
Star River seems to have issues collecting payments from their customers as the A/R remains high. They should certainly spend some time collecting bills and then using the cash to pay off short-term debts which have increased the interest expense dramatically.
Since 1998, Star River’s ROA decreased by 6.9% which means that they are not using their assets efficiently. The current and quick ratios indicate that there may be cash-flow problems in the future as the firm’s accounts payable and receivable have both been increasing which is most likely the reason for increased borrowing. Despite the high level of debt, Star River continues to issue dividends to its shareholders instead of paying off some of its debt or accounts payable.
A major weakness for the company is that they need to borrow money to currently operate, current cash flows are unable to handle the daily financial needs of the company. As the banker stated in the case “the firm is growing beyond its financial capabilities” and overall the company’s financial position is weak and could become even weaker if they decide to borrow more money for the new equipment.

Using the percent-of-sales method the financial forecasts for 2002 and 2003 are shown in Exhibit A. Using various assumptions from the previous three years, table A shows the percentages that were used to forecast the following years.
Whilst maintaining levels of operating efficiency, depreciation and purchasing new equipment, they will require additional funds in the order of SGD 10million for 2002 and SGD 21million for 2003. This means that Star River Electronics cannot pay off its loan in a reasonable period.


Inventory levels are a...

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