Financial Performance Evaluation and Strategies for Gentry Electronics

This report, prepared by the Chief Finance Officer, analyzes Gentry Electronics' financial performance and evaluates its strategies for value creation and maintenance. It examines key financial ratios like quick ratio, current ratio, gross profit ratio, inventory turnover, and inventory days over a four-year period. The analysis reveals declining profitability, inefficient inventory management, and potential financial and operating risks. The report suggests remedies such as quality standard reviews, regional positioning, improved marketing, value-based pricing, and disposal of obsolete inventory. It also addresses potential concerns from management regarding increased personnel costs and profit loss from discounted inventory sales. The report concludes with a discussion of the company's financial risks and potential sources of financing.

To: Chief Executive Officer,
Gentry Electronics
Report on Financial Performance Evaluation and Recommendation of
Organization Strategies
Prepared By: (The Student’s name) (Chief Finance Officer)
9th April, 2022.
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TABLE OF CONTENT
Executive Summary 3
Introduction 5
Financial Analysis 5
Potential Remedies to the Problem 7
Possible concerns to be raised by the management 10
Company’s Risk 10
Cooperate governance and ethics 12
Conclusion 12
References 13
Appendix 14
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Executive Summary
Aim and Objectives
The aim of this report is to give a detailed analysis of the organization’s financial
performance and evaluate the organization’s strategies for Value creation and
maintenance. The report focused on the ideas of the CEO and the manager about the
company’s current problem, relevant ratios are computed to give Judgment and
Recommendation.
Findings
The results of the financial analysis computed reviewed the arising threats in the
company performance and how it will have an adverse impact on its financial
performance in the long run. The continuous reduction in profit is as a result of decline
in the profit (gross and net) particularly due to the increase in the cost of goods sold and
operating expenses that are inefficiently managed.
The financial ratios computed pictured show ill-performance over the last four year,
amongst all, the current ratio and quick ratio show a better performance.
The ideas given by the CEO and the manager brings the possibility of the company
facing financial and operating risks if such ideas are injected into the company. Those
ideas are also capable of raising cooperate governance issues in the area of proper
accountability and ethical issues such as window dressing which explains a way to
making the company’s structure expanding and as well makes the company problem
less obvious to notice.
Potential Remedies to Problems
 Quality standards review of the company’s electronic products and varieties
 Regional Positioning
 Good marketing strategies
 Value-Based Pricing Strategy
 Disposal of Obsolete Inventory at discounted price
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 Reviewing of Rental or Storage Cost
 Proper Planning and Forecasting
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INTRODUCTION
Following the meeting held with the CEO, I the Chief Finance Officer was charged to
analyze the company’s present situation and make suggestions on the organizational
strategies that will enable the creation and maintenance of value. This report contains
an analysis of changes in quick ratio, inventory, gross profit, and current ratio across the
four years.
This report encompasses an evaluation of the impact of these changes on the company
performance and how these impacts align with the CEO’s concerns. It also contains the
evaluation of arising financial and operating risks if the CEO and manager’s suggestions
are injected into company.
FINANCIAL ANALYSIS
Acid-Test (Quick Ratio)
The company’s quick ratio fluctuated over the last four years, its results to 26% between
2018 and 2019, a drastic decrease of 19% between 2019 and 2020 with a slight
increase to 22% between 2020 and 2021. The rise still resulted into a value greater than
one. And on the average, the quick ratio revolves around 22%.
This indicates that the company can meet up its short-term obligations if all is due at
once without the inclusion of inventory. The increasing quick ratio equates that the
accumulated cash is sitting idle which ought to be reinvested or otherwise put into
productive use or the reduction of current liabilities.
The increasing value is a result of the increase in the current assets and reduction of
current liabilities which consists of cash inflow injected business, bank loans and
overdrafts etc. The implication of this is that due to the company’s current situation
having lots of idle cash, the ability of the company to meet its short-term obligation
without putting inventory into consideration is not undermined.
Current ratio
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The current ratio of the company also fluctuated over the four years with 13% increase
between the year 2018 and 2019, a decrease to 7% between 2019 and 2020 followed
with an increase to 24% between the year 2020 and 2021. The increase gives a ratio
greater than one. This indicates that the company can meet up its short-term obligations
if all is due at once.
The increase is a result of the rise in inventory which consists largely 50% of current
assets. The implication of this is that due to the situation of the company having lots of
obsolete inventories, the level at which the company will be able to meet up its present
obligations cannot be determined.
Profit Analysis
Gross Profit Ratio
The gross profit of the company has inversely reduced over last the past four years and
this has resulted into a gross profit ratio0 of 15% between 2018 and 2019, 10%
between 2019 and 2020, followed by 11% between the year 2020 and 2021.Although
company enjoyed a high gross profit ratio of 48% in 2018, but over time it diminished
down to 32% in the year 2021.
It explains that the persistent increase in sales does not align up with the increase in the
cost of goods sold. The reduction in gross profit ratio affects the net income after
deducting operating costs, which justifies the CEO’s concern on the possibility of
heading into losses in the coming period.
Inventory Analysis
Inventory Turnover
Inventory turnover has constantly reduced in four years with a reduction of 2% between
2018 and 2019, a decrease of 8% between 2019 and 2020, and a continued decrease
of 7% between 2020 and 2021. This implies that the company sells its goods faster in
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the year 2018 when compared to the recent year 2021, this is a result of the lack of
available desired products of the customers with a high level of inventory in-store.
The implication of this is that the company sales level has been adversely affected and
this has an impact on the profit level accrued to the company due to low sales of the
product in-store and this has resulted in the loss of potential customers because of the
existence of stock out which affects the strategic positioning of the company. This
confirms the concerns of the CEO about the huge availability of obsolete stock in store
which clearly depicts that the company is not selling its goods in due time, and this will
affect the overall profit of the organization.
Inventory Days
It takes a longer time for the company to convert its inventory to sales, having an
increasing inventory of 43 days to 49 days over the period. This implies that it takes
more days for the company to sell its inventory, the existence of this difficulty to sell its
inventory is as a result of the availability of high obsolete inventory in store, which is not
preferred by customers, the existence of obsolete inventory will automatically bring
difficulty converting to sales.
This brings the risk of the stock being sold below the normal price but at a much-
reduced price which will reduce the profit attributable to the sale of each stock and the
profitability of the company, this confirms the CEO’s concern on excess obsolete
inventory in store and selling it at discount.
Potential Remedies to Problems
 Quality standards Review of the company’s electronic products and varieties:
Considering the company’s present condition of products, there’s a need for
improvement and upgrade onto the company products in the case of standard fallout
and setting high-quality standards that will help reduce the customer complaints to a
minimal level and curb the issue of stock out. The reviewing of the company's products
quality standards will help to picture a good image of the company and its products in
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the face of potential and existing investors and thereby placing the company in a better
strategic position. This will also solve future problem of obsolete inventories thereby
reducing the CEO’s concern.
 Regional Positioning
With an analytical consideration of the kind of the Gentry's products and varieties, there
needs to be a proper positioning of products regional based on a market study of which
areas or region demands more of the company products amongst the rest. The
composition of the region determines whether there will be high demand, a region with
population that loves electronics generates high possibility of enjoying massive demand
for products compared with a region with population who are indifferent about
electronics the demand will be very minimal. This observation can possibly help to aid
the company to achieve its goals.
 Productive marketing strategies
The company should involve in marketing strategies that will give productive resilt in
areas where the company's products are not much stationed in the country, to curtail
the complaints of unavailability of desired products demanded by the customers
Focusing on products that sell less and reaching out to customers that are hard to
reach. Reaching out to new markets and using all available marketing mediums will help
create product awareness for the company in order to achieve the goal of increasing
sales and thus improve the inventory turnover rate and profit. Involvement in an
aggressive marketing activity will help the company solve the problem of stocking out
with customers which are a result of a lack of customer preference despite having high
inventory and also solve profitability issues.
 Value-Based Pricing Strategy
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The price attached to products can in some cases be tricky, especially selling multiple
items on a global scale.; The value-based pricing can help to placed an exact value on
every products purchased. Effective pricing strategies have positive effects on inventory
turnover and the profit of the company.
 Sales of Obsolete Inventory at discounted prices
The need to sell off its obsolete inventory will increase cash to meet up with short-term
obligations, this solves the problem of obsolete stock. Selling the inventory at
discounted prices will increase the inventory turnover and inventory days which also
have an impact on profits (gross and net). Taking this action will reduce the actual profit
to be earned from each product but it is better than disposing of them at scrap value.
The sale of all obsolete inventory will address if there is a need to keep the additional
warehouses. Overall, this has an impact on the profits of the company, adopting this
solves the CEO’s concern.
 Reviewing of Rental or Storage Cost
The increase in Storage cost as a result of the increasingly diverse inventory, this
should be questioned because the component of the increasingly diverse stock is made
up of obsolete inventory and it is based on no customer preference, stocking inventory
that sells should be the basis for storage. The reduction in storage cost will reduce both
cost of goods sold, and operating expenses which will have tremendous effects on profit
(gross and net), a reduction in the storage cost will increase both the Gross and Net
Profit.
Possible concerns to be raised by the CEO and the management from the
suggestion raised above
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1. Increase in personnel cost as a result of the recruitment of professional staff in the sales
and marketing division to curtain the loopholes in sales level:
The involvement of new qualified personnel can be expensive because they charge
high fees; this will be a raise a concern to the management because its can lead to
increase operating costs which will reduce profit.
2. The loss of profit from selling the inventory at discounted prices to clear off Obsolete
stocks:
This action means the company will lose lots of profit, which is not good for the
company, the management will want to maximize every returns that should accrue to
the company, the loss of a substantial amount of profit will be of great concern to the
management. The management will be specific about the loss of profit thereby looking if
there are other ways the inventories can be sold without losing the profit and retaining
the cost.
Two alternative sources of finance for Gentry
 Retained Earnings
 Issue of Shares (IPO)
Company’s Risks
Financial Risks
 Risk of Excessive loss overtime
The company is exposed to this risk based on the analysis of the company’s financials
over the period, the risk of making a loss brings the risk of the ability of the company to
meet its financial obligations which can lead to the risk of being bankrupt, in the long
run, they won’t be able to meet up financial obligations which can lead to a closedown
of the company. The ideas of the CEO and manager bring the risk of the company
making a loss because the manager is not interested in the company’s actual
performance but in making the company have the look of expansion and performing
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well. The CEO’s idea to sell out all the obsolete inventory is good, but it has not solved
the future risk of the company making losses.
 Credit Risk
The exposure of the company to credit risk brings a financial risk, risk that the company
will default in the payment of interest and capital, also the risk of the increasing cost of
servicing debt. The idea given by the manager brings in Credit risk due to the additional
fund providers to boost the company’s financial position which creates the risk of the
high cost of servicing these funds. Therefore, this exposes the company to the risk of
paying both its interests and principal in the long run coupled with the additional fund
providers.
Operating Risks
 Competitive Disadvantage: The ideas of the CEO and the manager will put the
company in a competitive disadvantage position because their ideas solves the
problem of the company superficially, whereas the company is losing out
customers due to the unavailability of preferred stock.
 Legal risks: The legal risk that will be faced by the company is the risk of being
fined or sanctioned by the government because they do not have the
authorization to trade in foreign currency.
Cooperate Governance Issues
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The code of cooperate governance clearly explains the responsibility of the CEO and
the board of board of directors, which state that the CEO and the board of directors
must be made accountable for their actions to the stakeholders and the entire society,
the board of directors must avoid unfair practices, cheating, and exploitation. The ideas
presented by both the CEO and the manager negate the code of accountability in
cooperative governance, the CEO is trying to make the actual problem of the company
less obvious to the stakeholders which explains why she wants to manage the situation
to avoid attention from the board and fund providers. Also, the manager’s idea brings
into play the code of accountability because his idea is to bring the company in a state
where stakeholders see they are expanding but it in reality the company is not
expanding.
Ethical Issue
The existence of the indirect idea of window dressing by both the CEO and Manager is
unethical because it is misleading, it merely robs results from a future period to make
the current period look better and it is extremely short-term in nature. The ideas only
improve the appearance of the company’s financials to the extent that they won’t record
losses and make the company look like it is expanding.
Conclusion
The outcome of the analysis justifies the CEO’s concern, and the implementation of
recommended strategies will enable the company to solve current and future problems
and risks and bring the company into a better position.
Thank you.
Yours faithfully,
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