Jay Johnson

Jay Johnson recently became a proud alma mater of an online university, a joint venture by several prestigious international universities set up in response to challenges from MOOCs. He graduated with a degree in finance and a 4.0 GPA by "collaborating" with better students in individual online-based assignments. Although he was interviewed by many bulge-bracket investment banks, he did not make it past the first round for any of the interviews since he does not really know much finance, including the basic tenet that "there is no free lunch". Interestingly, this tenet applies to life as well?choices that Jay made during his university days out of convenience have come back to haunt him. After some thirty interviews, Jay finally landed a corporate finance job with Alset.

Alset Private Limited

Alset, a private company incorporated in Singapore, manufactures parts for automobile manufacturers worldwide. The company was incorporated in 2000 and today produces a full range of products, including windshields, brakes, power seats, instrument panels, battery chillers, acoustic dampers, liftgate gas springs, and power steering mechanisms.

In the last month, Alset has received two new orders for the delivery of parts over three years:

The first order is for customised batteries for Specific Motors, a new customer that manufactures electric cars and has the potential of becoming a major customer in the future if electric cars take off in a big way. The contract has deliveries that match the expected demand for electric cars and, so, most of the sales is toward the end of the contract.

The second order comes from Toyoda Motors, Alset's largest customer. It requires new airbags urgently, which can be easily produced and provides a revenue bump in the first year, followed by seemingly stable revenues for the next two years. While Toyoda Motors has been a good customer in the past, its orders have decreased by 25% over the last two years because it has ordered parts from other suppliers who promise to deliver at competitive prices, sometimes at the expense of quality.

The expected revenue (in S$ millions) from the two orders are as follows:

\fAlset Pte Lid's financial year-end is 31 December All figures in the financial statements are in $$ thousands. Profit & Loss Account 2014 2015 2016 2017 2018 Sales 56,680 53,259 60,696 71,323 44.540 Less: COGS 22.672 23,304 25,278 29,529 19.816 Contribution margin 34,008 29,955 35,418 41,794 24.724 Wages 5.668 5.426 6.870 7,532 4.454 R&D 8.502 7,989 9.104 10,698 1,688 Depreciation 4.527 5.491 6.170 6.117 6.916 Other costs 2.551 2.397 2.731 3.210 2,004 Total cost 21,248 21,302 24,875 27.557 15.062 Earnings before interest & taxes (EBIT) 12,760 8.653 10,542 14,237 9.662 Interest paid 3.667 3,046 2.150 1.447 1.267 Taxes paid 2.273 1,827 2,548 3.547 1,350 Net Income 8,820 3.680 5.844 9,242 7.044 Balance Sheet as at 31 December 2014 2015 2016 2017 2018 Fixed assets Building & land 10,000 10,000 10,000 10,000 10,000 Equipment less depreciation 28,275 31,070 28,658 27,726 26.791 Other fixed assets 125 143 145 509 1.124 38,400 41,213 38,803 38,235 37,915 Current assets Cash 3.445 3.874 5,848 5.100 3,690 Accounts receivable 13,016 12,005 12,693 11,099 12.633 Inventories 9.171 8,550 8,445 8,899 8,943 25,632 24,429 26,986 25,097 25.266 Total assets 84.032 85,642 85,789 34,232 83.181 Current liabilities Bank overdraft 42.677 40,881 34,589 22.940 16.987 Accounts payable 4.534 4.261 4.856 5.706 3.563 47,212 45,141 89.444 28,646 20.550 Owners' equity Share capital 10,000 10,000 10,000 10,000 10,000 Retained earnings 6.820 10,501 16,345 25,586 32.631 Total liabilities and equity 84,032 85,642 85,789 64,232 63,181 Statement of Cash Flow 2015 2016 2017 2018 Net income 3.680 5.844 9.242 7,044 Add depreciation 5.401 6.170 8,117 8.916 9.171 12,014 15,359 13,960 Changes in working capital (increase)/decrease in inventory 621 105 (454) (44) (increase)/decrease in receivable 1.012 (689) 305 (635 increase/(decrease) in payable (274) 595 850 (2.143) 1,359 12 1,091 (2.821)Net cash from operations 10,530 12,025 16,450 11.139 Net cash from investing activities (8.304) (3.760) (5.549) (6,596) Operating cash flow 2.226 8.265 10.901 4.543 Cash flow provided by financing activities Bank overdraft (1.797) (6.292) (11,649) (5,053) Share capital Net cash from financing activities (1,797) 6.292 (11.649 5.953) Net cash from activities 430 1.974 748) (1,410) Beginning cash 3,445 3.874 5.848 5.100 Ending cash 3.874 5.848 5.100 3.890 Financial Ratios 2014 2015 2016 2017 2018 Activity Average age of inventory (days) 59 51 46 73 Average collection period (days) 84 82 76 61 104 Operating cycle 143 141 127 107 177 Liquidity Current ratio 0.54 0.54 0.68 0.91 1.23 Acid test ratio 0.35 0.35 0.47 0.60 0.79 Cash ratio 0.07 0.09 0.15 0.18 0.18 Leverage Total debt to equity ratio 2.81 2.20 1.50 0.80 0.48 Interest cover (EBIT/Interest paid) 3.48 2.84 4.90 9.84 7.63 Profitability Gross margin (Contribution margin/Sales) 0.60 0.56 0.58 0.59 0.56 ROA 0.11 0.06 0.09 0.14 0.11 ROE 0.41 0.18 0.22 0.26 0.17 Components of ROE Net profit margin D.12 0.07 0.10 0.13 0.16 Total asset turnover 0.89 0.81 0.02 1.11 0.70 Equity multiplier 3.81 3.20 2.50 1.80 1.48