Background Information
This discussion addresses the following Module Outcomes:
Evaluate a firm’s use of leverage using financial statement analysis. (CO1, CO2)
Evaluate trends in the firm’s pattern of operations using financial statement analysis. (CO2, CO3, CO4)
Evaluate the financial position of the firm using time and trend or peer-group analysis. (CO2, CO4)
Fuling Plastics USA is a subsidiary of Fuling Global, Inc (Links to an external site.)(Nasdaq ticker symbol FORK). Fuling manufactures environmentally-friendly plastic food-service disposable products (‘disposables’). Their historic strength has been in the production of disposable cutlery, the quality and value of which has satisfied the exacting requirements of large, sophisticated, multinational purchasers that have decades of experience sourcing foodservice disposables. Fuling has built on that strength to deliver drinking straws, cutlery and service ware, such as cups and plates, to customers around the world (Fuling Plastics USA, 2015). However, their largest customer base is in the United States, which accounts for more than 90% of their revenues. Fuling has been in discussion with Bunzl Distribution USA, which owns and operates more than 100 warehouses that serve all 50 states and Puerto Rico, as well as Canada, the Caribbean and parts of Mexico.
Bunzl Distribution controls more than 4,000 employees and 400,000-plus items in stock at any time (Bunzl Distribution, 2016).
Discussion Prompt
For purposes of this discussion, assume that you are the finance manager for Fuling Plastics, USA. In speaking with other managers, the firm’s chief executive officer (CEO) has determined that substantial opportunities for growth exist. You have been invited to discuss Fuling Plastics, USA’s financial ability to take advantage of these opportunities. You are aware that acquisition of Bunzl’s supply chain abilities and existing assets are seen as an important strategy in managing Fuling Plastics’ growth rate.
Assume that current sales are $1,000. Fuling Plastics USA growth may exceed 50% in the upcoming year, and the Bunzl partnership may help alleviate the need for an expansion in fixed assets through other means. Using a percentage of sales methodology, assume that Fuling’s net fixed assets are a fixed percentage (180 percent) of its sales, while costs are a fixed 80% of sales, so the firm’s profit margin is constant. The company hopes to achieve at least a 25% growth in sales in the coming year. At the current level of sales, with Bunzl additions, capacity utilization will stand at 80%. Assume that Fuling maintains a fixed dividend ratio of 33.3%. Assume that current liabilities do not vary spontaneously with sales; we will disregard the effects of depreciation.
50% increase in sales
Given:
Current Sales $ 1,000
Current Assets (Ratio to Sales) 20%
Increase in Liabilities and Owner’s Equity $225
Net fixed assets (Ratio to Sales) 180%
Costs (Ratio to Sales) 80%
Profit Margin Constant
Existing Priorities Leave total net working capital unchanged
Keep dividend payout ratio constant
Table 1. Fuling Data
Tasks
Compute and evaluate Fuling’s external financing needed (EFN) in the event that sales grow 25% in the upcoming year, and explain each factor which the company must consider in planning for this level of growth. Specifically, consider capacity utilization and external financing needed.
Compute and evaluate Fuling’s options in the event that sales subsequently grow an additional 50% and the firm wishes to maintain current assets at 20% of sales, explaining which components of its financial policy the company must consider in planning for this level of growth. Specifically, consider profit margin, dividend policy, financial policy, and total asset turnover.
Book of Reference:
Fundamentals of Corporate Finance, Twelfth Edition
Published by McGraw-Hill Education, 2 Penn Plaza, New York, 10121
Copyright 2019
