Aurora-Textile-Company

Case Questions

1. How has Aurora Textile performed over the past four years? Be prepared to provide financial ratios that present a clear picture of Aurora’s financial condition.

From 1999 through 2002, the financial performance of Aurora was unattractive and disheartening. This could be attributed to the business risks that arose from the intense competition that characterizes the industry in which Aurora operates. Absent an industry benchmark or comparable with which to gauge the performance of Aurora, we utilized a trend analysis of the period 1999 through 2002.

With 1999 as a reference point, we noticed that all measures of profitability have worsened. On a cumulative annual basis, net sales have been declining by 15%, while profit margins

and ROA were always in the negative (see exhibit 1). While raw material cost as a percentage of net sales have been declining, the cost of conversion is escalating and affecting the bottom-line (see exhibit 1). It is obvious that Aurora needs to manage its expenses to generate profits from sales. While on the surface, the liquidity measures have improved (see exhibit 1), it is doubtful that the company has the ability to meet its current obligations with just cash and cash equivalents on hand. This is partially due to the fact that many of the firm’s current assets are predominantly account receivables and inventories. While it is true that the firm, its competitors, and the industry are continuing to lose money, an effective cost-control strategy – i.e. a strategy that improves profit margins, reduces operating costs, and appropriately manages inventory and account receivables will be crucial for Aurora to remain sustainable.

2. List the factors affecting the textile industry. What do you think is the state of the industry in the United States? How should you incorporate the state of the textile industry into your analysis? Why should anyone invest money in the industry?

3. What are the relevant cash flows for...