HAMLINE UNIVERSITY SCHOOL OF BUSINESS

Star River Electronic Ltd

Group ID:

9001737
9236180
9158622
9726998
9095520

Introduction:
Star River Electronics is a joint venture company known to be a large manufacturer and supplier of quality
CD-ROMs to software companies. The joint venture company was founded in Singapore by Era Partners, an
Asian venture firm, and Starlight Electronics Ltd, a UK company. In the past, Star River Electronics
(reputable for producing high-quality discs) experienced a great success in its industry. In the 1990s, the
high demands for CD-ROM lead to more competitors to the market, which caused a huge price competition
(cutting down prices by 40%), an increase in substitute products. However, Star River survived the difficult
time because of its reputation for high quality products.
Even though Star River survived the harsh competition, the substitute storage devices such as the DVDs still
pose a huge threat to the company because they offers 14 times more storage capacity; as research have
predicted the market share of optical-disc-drive will drop from 93% to 41% by the year 2005 for an increase
in the share of DVD drives from 7% to 59%.
Key Issues:
As the new CEO, Adeline Koh needs to address immediately the increasing threats of the new DVD product
and Star Rivers capability to mass-produce this new product in 2002 and 2003. Star Rivers lack of
capability to produce DVDs in a large scale is very critical as the market predicts the shares of DVD will
jump to 59% by 2005 and Star River only dedicated 5% of its current production to DVDs.
The second issue Koh has to resolve is the company debt situation because the banker, Mr. Tan, is doubting
Star Rivers capabilities to pay the bank back with the company current financial performance. This issue is
also critical because Star River relies heavily on short-term borrowings for its operation. This reliance will be
discussed in details under the financial analysis section.
The third issue for Koh is to decide if she will invest now or wait for three years in the new packaging
machine for Star River since the new machine will save the company significantly on labor costs and provide
more sustainability to the company, but it will cost the company SGD1.82 million.
Lastly, Koh needs to know what the expected returns on book assets and equity are for the firms and the key
drivers for the returns.
Information, Evidence and Assumptions:
Also, the historical income statement and balance sheet for Star River Electronic are good sources to use to
forecast future financial performance as well as debt requirement. The income statement and balance sheet
show net sales, earnings, dividends on share, assets, liabilities, debt and equity of the company which are
useful for analysis to predict future performances based on past performances as well as the WACC. The
ratio analysis has the data for the return on sales, equity, and assets that will be needed to analyze and
forecast future percentage for the company performance. The last important piece of data is the data on
comparable companies where it listed the beta for calculations of the WACC.
Analysis:
Evaluating the financial information (Exhibit 3) and the estimated future growth of Star River, it can save on
the new packaging machines amortization cost, maintenance cost, downtime and the purchase price, a total
savings of SGD 388,793 within the first 3 years. Exhibit 1 and 2 explain that the company would be better
off with the DVD equipment and the new packaging machine rather than the DVD equipment only. The
overall performance compared to the number of days for producing just CD-ROM shows that there is a

decrease in performance. Star Rivers financial information also shows that as the companys debt increases
as its operating margins and return on assets decreases; indicating managements ability to manage its debt
rather than assists.
From the balance sheet in exhibit 2, debt to equity ratio increased from 1.13 to 1.21(93.6%) proving their
ability to cover interest with the times (x) interest earned ratio which is to some extent two times in 4 years.
An increase in the short-term borrowings (29,002 in 1998, 37,160 in 1999, 73,089 in 2000 and 84,981 in
2001) led Quick ratio to remain stable in 1998 and 1999, but decreased to 0.31 and 0.34 in 2000 and 2001
respectively. The quick and current ratios are all less than 1, explaining that total current liabilities exceed
total current assets. Without the benchmark given, the evaluation of the given data also tells that the company
is financing some of its short-term debt with short-term borrowing. Again, the ratios of cash to short-term
borrowings from 1999 to 2001 are 17%, 15%, and 8% correspondingly. Although, Star River can meet its
short-term debt, it is making profit and paying out dividends to its shareholders hence liquidity ratio within
industry average.
Similarly, days to receivables, payables and inventory turnover can be used to ascertain the Star Rivers
position in relation to efficiency. As shown in Asset Utilization on exhibit 3, the days in receivables from
debtors must be less than the days in payables. In 1998 and 1999, the company was getting early payment
from debtors as compared to days the company was paying out its creditors.
However in 2000 and 2001, days in accounts receivables were longer than in payables which resulted in high
borrowings hence tying up cash to their customers. It would be advisable for Star River to review its credit
policy in other to receive enough receivables before paying its creditors without it being a barrier between
customer relationships. Analyzing the inventory turnover, it took longer time for Star River to get rid of its
stocks in 2000 and 2001. Stocks were held more than a year, causing longer period of cost of holdings and
liquid cash tied up in stock (leading to cash shortage). From 1998 to 2001, there was a 5% decline in the
companys cash, a 26% increase in accounts receivables and a 12% increase in accounts payable from 2000.
Star River needs to review its inventory holding policy depict exact stock holding days and to prevent
holding cost.
Financial Performance:
Amongst Star Rivers profitability, leverage, asset utilization and liquidity ratios which are all based on the
balance sheet, the profitability ratio (such as operating margin, return on sales, return on equity and return on
asset) seemed better off with slight increases (ROS= 8.0 in 1998, 8.2 in 1999 and decreases to 5.3 in 2000);
whereas operating margin was at 18.6% in 1998 and 1999; 15.6% and 16.1% in 2000 and 2001 respectively.
Free Cash flow represents the reveals how Star River get cash after resource for asset growth. The companys
free cash flow was also very unstable. The company also increased its Free Cash Flow (FCF) from 1999 to
2000 and yet a sweeping decrease in 2001. Star River uses its FCF as cash available as prospect to increase
shareholder wealth. Return on Invested Capital (ROIC) had a steady decline at 40% since 1998 and was
poorly managed that it became a concern to shareholders. Star River hardly made any money on its invested
capital. Early 2000, the cost of borrowing was higher than the return.
From the cash flow statement in exhibit 5, it is obvious that Star River is not managing its cash well enough
in operating/investment activities. The cash flow statement also depicts high increase in cash from financing
activities supporting the early statement of the company being dependant on financing support for operations.
Strength/Weakness: A critical analysis of the companys income statement is sturdier than the balance sheet.
Sales increased by 47% from 71,924 to 106,042 within 4 years as well maintaining steady production cost
SG&A. In the year 2000, the companys gross profit, EBITDA and EBIT increased transversely indicating a
higher interest expense leading to a decrease in EBT and Net Income. However, Star River recovered the loss
in 2001. One key weakness of Star River is its dependency on debt to fund operations and its low liquidity
ratios while taking into account the purchase of the packaging equipment. There is a need to raise concern

about the 174% increase in inventory which led to 193% increase in short-term debt; also increase
receivables rate and payable percentage proving that the balance sheet is not well managed.
Potential Performance:
Comparing the both linear sales and production trend in exhibit 5, Kohs estimated forecast 15% sales growth
is too aggressive. Koh estimated 2002 and 2003 sales SGD $121,948m and SGD $140,241m but the trend
depicts sales at SGD $116.386 and $129,350m. The average increase of sales was 13.83% from 1999 to 2001
as shown on the balance sheet. The increase in sales led to an increase in Earnings Before Tax and Interest
(EBIT) but affects earnings before taxes creating higher tax and lower net income hence less retained
earnings.
Balance Sheet: The companys balance sheet is still leveraged with the inventories and short-term debt; the
purchase of the new packaging equipment for SGD $1.82million. Star River can continue operating with
external funds if it does not add any extra projects and not purchase the equipment. On the contrary, the
companys outmoded equipment require extra labor hours and maintenance, and so the need to purchase the
equipment now.
Loan Payback: With all the aggressive and innovative fund management, the company will still have not
been able to pay back its loan within the given time frame. Star River can either decide to pay its loan back
and still pay out dividends of $2000 or reduce payback period and use the dividend for payback. It can take
up to 70 years for Star River to pay back the loan assuming the company follows previous years trend by
paying dividend and keeping a steady growth rate.
Ratio Forecast: The profitability ratio decreased except for Return on Sales (which increased as a result of
the 15% sales increase from the past years). Due to the increased debt the company has, ROE also decreased.
The companys ability to convene its long term financial obligations is seen on its leverage ratio. If debt is
well managed and could be used to establish earnings for its shareholders then a high D/E ratio would be
good (but not the case). Again, the low coverage ratio explains Star Rivers difficulty with paying its interest
on debt which is proven by the less cash on the liquidity ratio.
Due to the increase in fixed asset, the companys asset growth increased from 2001 and yet Star River still
had issues with inventory as shown in the inventory to COGS ratio and the decreasing inventory turnover
rate. Star Rivers management does not effectively manage and create enough value for its shareholders
wealth. Other alternatives Star River could consider are (1) go on with the current CD-ROM Market (2) Split
from new era and develop to its own entity (3) shift fully into the DVD Market.
Recommendation:
Star River should hold off on the purchase of the new packaging machine because it will save them SGD
388,793. They can use the money to pay back their loan and use it for other investing activities such as
expanding into the DVD market completely since it will be an emerging market in the future. It can use the
money to pay off some debtors or loans it current held.
Furthermore, Star River needs to announce new policy for account receivables and payables making sure
they will receive fund earlier than paying off their debtors because their cash is being held up due to long
receivable dates on the accounts and short payment days on the payables.
Next, Star River also needs to manage their inventory level making sure to write down their actual stock
holding days to shorter to avoid the high costs of holding inventory if they want to survive in the long run.
Lastly, they should focus on improving their products by switching more to DVDs production to increase
sales because with the current financial performance, Star River would not have the capabilities of paying

interest payments in the future if it does not improve on its EBIT especially with the huge loan they bestow
upon them.