Case study question 7.2: General Machinery Ltd

Case study question 7.2: General Machinery Ltd

General Machinery manufactures computer numerical control (CNC) equipment for its customers who use the equipment in the manufacture of electronic circuit boards. Ratios have been calculated from annual reports for the last five years and are shown in Table 7.19. The Statement of Cash Flows is shown in Table 7.20.

TABLE 7.19 Ratios.

  2014 2013 2012 2011 2010
ROI 5.0% 3.2% 3.6% 6.2% 5.8%
ROCE 9.2% 7.1% 6.2% 7.6% 6.4%
Operating margin 16.8% 13.9% 12.6% 15.7% 14.1%
Gross margin 70.0% 71.0% 72.0% 74.0% 75.0%
Overhead to sales 53.2% 57.1% 59.4% 58.3% 60.9%
Sales growth 11.4% 9.4% 6.7% 9.1%  
Working capital 198% 360% 340% 368% 326%
Acid test 135% 287% 270% 275% 243%
Gearing 42.0% 40.5% 38.6% 36.5% 37.4%
Interest cover 182% 162% 202% 376% 517%
Asset turnover 48% 46% 44% 44% 41%
Days’ sales outstanding 60 63 68 70 73
Inventory turn 3.3 3.1 2.8 2.2 2.3
Days’ purchases outstanding 78 88 102 105 111
Dividend per share $0.036 $0.027 $0.025 $0.036 $0.036
Dividend payout ratio 48.4% 57.9% 49.0% 41.4% 45.7%
Dividend yield 3.0% 2.5% 2.5% 4.5% 5.6%
EPS $0.075 $0.047 $0.052 $0.088 $0.080
P/E ratio 16.0 23.4 19.3 9.1 8.2

General Machinery’s Statement of Cash Flows is also shown for the last few years (Table 7.20).

TABLE 7.20 Statement of Cash Flows.

  2014 2013 2012 2011
Cash flow from operating activities        
Cash receipts 772,000 700,000 635,000 595,000
Cash payments −628,000 −601,000 −537,200 −503,000
Interest paid −72,000 −60,000 −40,000 −25,000
Income tax paid −17,700 −11,100 −12,240 −20,700
Net cash from operating activities 54,300 27,900 45,560 46,300
Cash flow from investing activities        
Payments for property, plant & equipment −200,000 −50,000 −50,000
Net cash used in investing activities −200,000 −50,000 −50,000
Cash flow from financing activities        
Proceeds from borrowings 50,000 50,000 50,000
Dividends paid −20,000 −15,000 −14,000 −20,000
Net cash from/used in financing activities 30,000 35,000 36,000 −20,000
Net increase/(decrease) in cash −115,700 12,900 31,560 26,300
Cash at beginning of year 135,700 122,800 91,240 64,940
Cash at end of year 20,000 135,700 122,800 91,240

1. Discuss the major issues facing the company.

2. Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.

3. In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?

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