Large parcels of land were purchased in 2002 and 2003. The net Plant and Equipment amount increased by 437% from US$14,633 to US$78,550. Too much money was tied up in this long term asset. The purchase of land was claimed for company’s expansion which is usually a good signal.However, it was not the case. Much of land was found to be in poor location and the company was overpaid by huge amount. The property was expected to be worth only US$50 million.
Therefore, company was waste of significant amount of money in this long term property. After revaluation of the property, total asset will drop down significantly.Long term debt increased by 522% from US$6,738 million in 2000 to US$41,921 million in 2003. Moreover, the Calgary Bank (CB) had called CI’s line credit and long-term debts due to violation of the current ratio requirement of 1. 5. Therefore, line of credit in 2003 was zero and all the long term debt was shifted to current portion of long term debt. A significant amount of long term debt became outstanding at the end of 2003.
Without sufficient cash top up to repay the amount, company may have to face with bankruptcy proceedings from the bank.The chart above shows that net PP&E and total liabilities increased parallel with each other while common shares remained unchanged. Therefore, we can conclude that most of the money invested in overvalued property was financed by debt. Company now in a very risky position since its huge property which was used as collateral of long-term debt was written-off to worth only US$50 million. a. Sales level increased by 94% between2000 and 2003.
However COGS even rose at faster speed of 116%.Therefore, although gross profit increased by 62% in absolute amount, the gross profit margin ratio dropped from 41% in 2001 to 34.4% of total sales in 2003.
High cost of good sold reflect company poor control of cost and ineffectiveness of its operation. b. Majority of sales was in credit and was not expected to collect since as stated earlier, the account receivable is estimated to collect only 0. 035% of the amount outstanding.Therefore, the table below show that despite the increase in sales, net income dropped by 88% from US$3,432m in 2001 to only US$419m in 2003 c.
It puts the company in the brink of bankruptcy because of huge shortage of cash as a result of significant high cost of good sold and no cash collection from sales.