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Star River Electronics Ltd.

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Florida Atlantic University

FIN 4422

Dr. Rainford Knight

Star River Electronics Ltd.

Steven Garcia

Case Summary

        Star River Electronics, Ltd. was founded as a joint venture company and quickly became a leader in high-end CD-ROM’s, which was their main product. In the mid-1990’s the market became flooded, which drove down asking price of CD-ROM’s and Star River’s price points. In spite of this, based solely on their reputation, Star River was able to survive the saturation of the market.

        However, the market was seeing a shift from CD-ROM’s to DVD’s, which had 14 times more capacity. A 1999 study predicted that CD shipments would decline by 41% and the DVD market would rise by 59%. At the end of 2001, Star River’s DVD sales were less than 5%.  

        Star River Electronics is also facing executive changes due to the recent resignation of the former President and CEO. With Adeline Koh being named CEO, Star River was facing not only a change in new leadership, but also a shift in the market and consumer desires.

Hence, the following sections will analyze and focus on past and future financial and performance data to provide alternatives and recommendations to Star River as to the financial health of the company.

Case Analysis

This section focuses first on Star River Electronics Ltd. historical data from 1998 throughout 2001 to describe in qualitative and quantitative terms their past performances, trends, and position in the market. The second section focuses on pro forma projections the company used to evaluate their future performance and investment attractiveness.

Historical Analytical Financial Ratios

From Star River’s Profitability ratios in Table 1, you can see there is trouble. Based on a percentage of sales, year 2001’s account receivables are at 33.46% while the accounts payable is low at 12.61%. This tells me they aren’t efficiently collecting from their customers. Since 1998, their operating margin percentage has decreased, and their returns increased extensively. Both are not good signs.

        From 1998 – 2001, cash saw a 5% decline, and account receivables saw a 26% increase and accounts payable only a 12% increase from 2000. Inventories have increased significantly (174%) during the past four years in an industry that will soon be close to obsolete. Star River’s short-term debt has also increased significantly by 193% over four years. This is of concern since their cash inflow has also decreased.

        Star River’s days in receivables have been increasing since 1998 and their A/R turnover ratio has not increase much over the past four years. This tells me they have a lot of cash tied up with their customers.

Profitability

1998

1999

2000

2001

Operating margin (%)

18.6%

18.6%

15.6%

16.1%

Tax rate (%)

27.9%

26.1%

24.7%

22.6%

Return on sales (%)

8.0%

8.2%

5.3%

6.7%

Return on equity (%)

16.7%

16.9%

11.7%

15.2%

Return on assets (%)

5.2%

5.2%

3.0%

3.9%

Table 1 - Profitability Ratios

Star River’s Historical financial health is not strong and most of their weak financial strength is due from and projected from balance sheet items. From 1998 – 2001, their debt to equity ratio has increase from 1.13 to 2.20 or 93.6%. Their ability to cover their interest is depicted with the times interest earned ratio, which over four years is only slightly over two times.

Leverage

1998

1999

2000

2001

Debt/equity ratio

1.13

1.21

1.99

2.20

Debt/total capital (%)

0.53

0.55

0.67

0.69

EBIT/interest (x)

2.45

2.48

1.82

2.18

Table 2 - Leverage Ratios

The historical sustainable growth rate in Table 3 below, Star River grew at an average rate of just over 10% between 1998-2001, however, the compounded annual growth rate (CAGR) of the company was higher than the SGR by almost 3%. A lower SGR than the annual growth means that the company was dependent on debt.  

The CAGR of the firm is 13.8%. This means that the firm’s capacity to grow on average is 13.8% and it is lower than Koh’s 15.0% growth estimate.

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