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California Chopper

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Submitted By mundlurus
Words 627
Pages 3
To: California Choppers
From: Hewlit & Partners
Date: Wednesday, November 11, 2015
Subject: Financial Condition of California Choppers

As per our agreement, Hewlit & Partners has been asked to come on board to help review California Choppers operations and make recommendations. In the following memo, we will detail our findings about the Company’s liquidity, asset management, long-term debt paying ability, profitability, and recommendations.

Liquidity

The current ratio of 2005 is 1.04, which is much lower than the industry average of 1.25. This is concerning, because the current ratio has been declining significantly since 2003. In addition, California Choppers’ agreement with the bank requires the Company to maintain a current ratio of 1.25 for the loans used for purchases of land, plant and equipment. Although the bank has been lenient in the past due to a strong relationship with Arlen Doakes, this relationship is not something that should be relied on completely. We cannot assume that the bank will take the violation of the debt covenant lightly. Current assets have been increasing largely due to Inventory, and current liabilities have been increasing due to Accounts Payable.

The cash ratio has also been declining since 2003. This may cause California Choppers to run into difficulties in trying to pay off current liabilities.

Asset Management

The inventory turnover has been decreasing from 2001 to 2005, from 83.93 to 37.46. This is less than the industry average of 44.12, and shows that the Company is having more trouble selling inventory. The Company has been doing well in collecting accounts receivable, as the A/R turnover has been increasing since 2002, and is higher than the industry average. However, the A/P turnover has been decreasing to 92.6, and is indication of a worsening financial condition. Although the ratio is above industry

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