CASE STUDY - RAZTECH PLC
Background - Raztech plc
Raztech plc is a manufacturer of computer hardware and accessories (Information Technology or IT from now on).
It was established in the UK in 1975 and has become a well-established supplier to IT retailers particularly in Western Europe and North America (but has begun to make progress in selling to the African, Asian, Middle Eastern and South American markets).
This growth into a multi-national company (based from the UK) was supported by becoming a publically listed company (plc) in 1995, listed on the London Stock Exchange.
The present Chair of the company is Patricia Whiteman, she has been with Raztech since 1988 and is the daughter of the company's founder, Raymond Razha, who died in 2004, after which Patricia become Chair.
Raztech's product range
The three core products for Raztech have followed the general evolution in IT.
The company still manufacturers' desktop computers, though the demand for this product has been in general decline. It has a customer base which tends to be businesses, who need the higher processing power and the larger hard drive space.
For customers buying computers for personal use, the laptop has generally replaced the desktop computer in the last 5 years as the main device for IT purposes. There is a wide range of laptop manufacturers in the market but is a product which presently makes the highest contribution to Raztech's revenue.
The last core product is the tablet representing the shift to more mobile IT devices. This is a growth area in both the personal and business IT market and is expected to become Raztech's main product by 2017.
Raztech also sells a number of accessories to complement the above products including keyboards, mice, printers, laptop cases, tablet covers etc...
Raztech has also been focusing on the development and launch into the market of two types of new products, which are based on making use of the increasing trends in the use of mobile IT. These are:
A hybrid (combination) of two core products the tablet and laptop, which allows the consumer to enjoy the advantages of both products. Sales of the hybrid have been good and presently have not impacted on the sales of either laptops or tablets in their separate form.
Raztech has also been focused on wearable technology which includes products like smart watches, and digital eyewear. These products have been popular with consumers who like to possess the latest IT products, but have also developed specific groups of consumers. For instance, the smart watches are popular with consumers who enjoy running and the digital eyewear is frequently used by surgeons in the medical sector.
Raztech's expansion
Raztech plc is in a two phase expansion strategy
- Phase one - which commenced at the start of 2014 is based around supplying a new range of products to the market. (Noted above)
- Phase two - In 2015 Raztech is seeking to take this wider range of products to make further progress in the African, Asian, Middle Eastern and South American Markets. This will require the company to develop production capability either in or close to these new markets. They therefore need to secure finance and they have approached you at Cranston Management Consultants to advise them.
Your role
You have just completed your MSc Management and joined Cranston as a trainee management consultant. You have been assigned Raztech plc as your first assignment because you previously gained work experience as a financial analyst. You will produce a 2,500 word business report for the Board of Directors which sets out your findings and makes recommendations.
Requirements
Prepare a 2,500 word business report for the Board of Directors providing analysis and business advice on the following:
1. Business Performance Analysis
Using the information in the case study, analyse the financial statements and critically evaluate the business performance of Raztech plc based on your analysis. Use extracts of the financial statements (exhibit 1), the additional financial information (exhibit 2) and ratio analysis (exhibit 3) and meeting notes (exhibit 6) to support your evaluation. 50 marks
2. One of the limitations of the financial statements is that they are historical, based on past information. You have received some new information (extract 4) from the external auditor regarding the £150m receivable balance due from Comet. Recalculate the liquidity and solvency ratios based on the revised financial statements. Compare the recalculated ratios with the present ratios (extract 3) and discuss whether the revised information would impacts on the bank's decision to provide financial support to Raztech plc. 10 marks
3. Critically evaluate the investment appraisal information (exhibit 5) supplied by the Chief Financial Officer, Cathy Keogh and advise the board of directors on other non- financial factors that they should consider regarding the expansion into African, Asian, Middle Eastern and South American Markets. 25 marks
4. Raztech plc has approached ABC Bank for a loan to fund the expansion into African, Asian, Middle Eastern and South American Markets. The bank has challenged the investment appraisal numbers and has requested Cathy Keogh rethinks the assumptions. Advise the Board of Directors on the benefits and drawbacks of two alternative sources of finance. 10 marks
5. Professional report format
The format of a professional business report.
Requirement 1 - Business Performance Analysis
Interpretation of the Statement of Profit or Loss
Use the case study information to analyse and comment on the movements in Raztech's Statement of Profit or Loss (financial performance) in Exhibit 1 during the year 2014 compared to 2013.
Ignore the revised statements in Exhibit 4 in answering this question.
Use the additional financial information in Exhibit 2 and the relevant ratios shown in Exhibit 3 to enhance the quality of your analysis.
As a guide, for each item you select to analyse and comment upon
i. Ensure you use an appropriate financial technique (Ratio, Trend analysis) to ascertain the movement between 2014 compared to 2013;
ii. Reflect and comment upon whether the movement is a positive or negative indicator of financial performance; and
iii. Use the case study to identify and explain why each movement has occurred and the implications for Raztech.
Interpretation of the Statement of Financial Position
Use the case study information to analyse and comment on the movements in Raztech's Statement of Financial Position (financial condition) in Exhibit 1 during the year 2014 compared to 2013.
Ignore the revised statements in Exhibit 4 in answering this question.
Use the relevant ratios shown in Exhibit 3 to enhance the quality of your analysis.
As a guide, for each item you select to analyse and comment upon
i. Ensure you use an appropriate financial technique (Ratio, Trend analysis) to ascertain the movement between 2014 compared to 2013;
ii. Reflect and comment upon whether the movement is a positive or negative indicator of financial performance; and
iii. Use the case study to identify and explain why each movement has occurred and the implications for Raztech.
Statement of Cash Flows
Consider this quote from the meeting notes in Exhibit 6:
"In previous years Raztech has been known to be a cash-rich business (generating lots of positive cash flow from their trade) and a regular payer of dividends to shareholders.
However in 2014 the company experienced a shortage of cash, which meant that it was unable to pay a dividend to shareholders."
i. Identify the parts of the Statement of Cashflow which indicate Raztech is no longer cash-rich, has not paid dividends and is experiencing a shortage of cash.
Calculate and explain Raztech's Operating Cash Cycle (OCC) for 2013 and 2014;
Requirement 2
Recalculate the liquidity (current and quick) and solvency (gearing and interest cover) ratios based on the revised financial statements. Compare the recalculated ratios with the present ratios (extract 3) and discuss whether the revised information would impact on the bank's decision to provide financial support to Raztech plc.
Requirement 3
Critically evaluate the investment appraisal (evaluate the forecast and investment appraisal techniques). Consider the outcome, and any benefits or limitations for Raztech. You should challenge the assumptions as part of your answer.
Advise the board of directors on other non-financial factors that they should consider.
Requirement 4
Two alternative sources of finance relevant to Raztech plc.
Requirement 5
Business report format - executive summary - key highlights (4 marks), format - headings, sub-headings, appropriate use of tables
Attachment:- Business School.rar