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Case on..

Deutsche Brauerei
Deutsche Brauerei
 Produce quality beers
 Founded by the Gustav Schweitzer in
Germany in 1737
 Capable of producing 1.2 million
hectolitres of beer per year
 In 1998, the company expands to
Ukraine
Economic situation
 Favorable environment for private
entrepreneur because of market reform
in 1995-1996
 Debt crisis in Russia,1998 causes
Depreciation of Ukrainian Hryvna
 Having Global economic recession the
growth rate is 7% in Ukraine
 PORTER’S FIVE FORCES MODEL
Threat of Potential Competitors
MODERATE
-Brand loyalty
-Easy access to distribution channel

Supplier’s Power Existing Rivalry Buyers’ Power

LOW HIGH MODERATE
-Low switching cost -Fragmented industry -Differentiation
-Low switching cost
-Low Entry Barriers
-Low Exit Barriers

Threat of Substitute
Products
LOW
Company Analysis
 Firm competitive strategy
 Differentiation
 High quality product
 Price leader

 SWOT Analysis
SWOT Analysis
Strengths
 Quality product
 Strong brand image
 Large market share
 Large market size
 Location advantage
SWOT Analysis

Weakness
 Reliance on debt financing
 Longer terms of trade
 Low retention ratio
 Large investment on accounts receivables
SWOT Analysis
 Opportunities
 Expansion opportunity in abroad

 Favorable foreign exchange rate shift

 Threats
 Default probability of distribution
channel
 Global economic recession
Analysis of financial statement
 Assessing Operating Management
 Evaluating Investment Management
 Evaluating Financial Management
 Assessing Operating Management
1,997 1,998 1,999 2,000 Average 

Gross Profit Margin 0.48 0.47 0.46 0.46 46.72%

Operating Profit Margin 0.07 0.08 0.06 0.07 6.90%

Net Profit Margin 0.04 0.04 0.03 0.03 3.38%

NOPAT Margin 0.05 0.05 0.04 0.04 4.37%

Assessing Operating Management
 Interpretation:
 Gross profit margin moreover stable but
operating profit margin increases due to lower
growth rate of operating expenses than sales
 Net profit margin decreases slightly due to
introduction of leverage as well as higher
interest expense
 Decreasing indication of the operating
performance of a company including only the
operating policy
Evaluating Investment Management
 Working Capital Management
 Long-Term Assets Management
 Working Capital Management
1,997 1,998 1,999 2,000 Average 
Operating working capital-to-
sales Ratio 0.03 0.04 0.07 0.13 0.07
Operating working capital
turnover 30.68 24.10 13.82 7.99 19.15
Inventory Turnover 5.26 5.53 5.66 3.87 5.08
Receivable Turnover Ratio 9.04 8.93 7.30 6.80 8.02
Accounts payable Turnover 9.02 9.42 10.79 10.40 9.91
Average Collection Period 39.83 40.30 49.30 52.98 45.60
Average days to sell the
inventory 68.44 65.16 63.57 93.12 72.57
Days' payable 39.93 38.22 33.36 34.62 36.54
Working Capital Management
 Interpretation:
 Firm is losing its ability to generate dollar
of sales for each dollar invested in its
operating working capital.
 Higher inventory conversion period &
average collection period
 Moreover less time taken to pay accounts
payable
 Long-Term Asset Management

Average
1,997 1,998 1,999 2,000  

Net long-term asset

turnover 1.63 1.97 2.68 3.75 2.51

PP&E turnover 1.77 2.18 3.02 4.37 2.83

Long-Term Asset Management
 Interpretation:
 Both show increasing pattern of firm’s
efficiency to use its net long-term assets
and property, plant & equipment.
 But it may be short term gain at the cost of
long term loss.
 It indicates to go for further expansion &
replacement of assets.
Evaluating Financial Management
 Current liabilities and short-term
liquidity
 Debt and long-term solvency
 Current Liabilities& Short-Term
Liquidity

Averag
1,997 1,998 1,999 2,000 e

Current Ratio 1.32 1.03 1.15 1.34 1.21

Quick Ratio 0.88 0.73 0.84 0.88 0.83

Cash Ratio 0.38 0.38 0.39 0.39 0.39

Operating cash flow ratio 0.50 0.38 0.37 0.37 0.40

Current Liabilities& Short-Term
Liquidity
 Interpretation:
 Though current ratio seems to be good but it
has some negative impact like-
 Higher inventory along with higher time for
conversion into cash
 Higher accounts receivable along with increasing
pattern of average collection period
 Operating cash flow shows decreasing pattern
of firm’s ability to cover its current liabilities
from cash generated from operations of the firm
 Debt and Long-Term Solvency
Average
1,997 1,998 1,999 2,000  

Debt-to-Equity 0.72 0.66 0.67 0.66 0.68

Total Debt to Total

Capitalization 0.42 0.40 0.40 0.40 0.40

Long-Term Debt to Total

Capitalization 0.35 0.17 0.14 0.12 0.20

Times Interest Earned 3.83 4.80 4.65 4.66 4.49

Cash Coverage Ratio 6.87 8.85 10.24 9.32 8.82

Debt and Long-Term Solvency
 Interpretation:
 Financial risk as firm mostly relies on
external financing
 Shows higher short-term loan rather than
long –term loan
 Higher trend of times-interest Earned
shows lesser financial risk.
 Fluctuating Cash coverage ratio but in 2000
it’s more than the average.
 Dupont Analysis
1,997 1,998 1,999 2,000 Average 
EBIT/Sales 7.31% 7.63% 5.95% 6.61% 6.87%
Sales/Total Assets 1.10 1.20 1.38 1.48 128.86%
EBIT/Total Assets 8.03% 9.12% 8.20% 9.80% 8.79%
Interest
Expense/Total Assets 2.10% 1.90% 1.76% 2.10% 1.97%
NBT/Total Assets 5.93% 7.22% 6.43% 7.70% 6.82%
Total Asset/Common
Equity 213.78% 206.69% 214.62% 218.58% 213.42%
NBT/Common Equity 12.68% 14.92% 13.81% 16.83% 14.56%
Tax Retention Rate 66.22% 65.46% 60.46% 60.99% 63.28%
ROE 8.40% 9.77% 8.35% 10.26% 9.19%
 Decomposed Earnings

1,997 1,998 1,999 2,000  Average

Operating ROA 7.48% 9.11% 8.07% 10.28% 8.73%
Effective interest rate
after tax 5.72% 7.26% 7.19% 10.33% 7.62%
Net financial leverage 51.95% 35.43% 31.78% 27.12% 36.57%
Spread 1.76% 1.85% 0.88% -0.05% 1.11%
ROE 8.40% 9.77% 8.35% 10.26% 9.19%
Decomposed Earnings
 Firm’s increasing ability to deploy its
operating assets to generate operating
profit
 Decreasing incremental economic effect
from introducing debt into the capital
structure and last year it was negative
 Decreasing pattern of financial leverage
gain to the shareholders
Risk Analysis
 Business risk
 Operating earnings volatility
 sales volatility
 Operating leverage
 Financial risk
 Debt equity ratio
 Interest coverage ratio
 Cash flow to total debt
 Business Risk
 Operating earnings volatility

  1997 1998 1999 2000

Operating Earnings (OE) 4541 5113 4903 6106
% change   12.60% -4.11% 24.54%
CV of OE       0.12
 Business Risk
 Sales volatility

  1997 1998 1999 2000 CV of Sales

German 62032 62653 64219 66216 0.03
Ukraine   4262 17559 25847 0.69
Total 62032 66915 81778 92063 0.18
 Business Risk
 Operating leverage

1998 1999 2000

% Change in Sales 7.87% 22.21% 12.58%

% Change in OE 12.60% -4.11% 24.54%

Operating leverage 0.93

Problems Statement
 Approval of the 2001 financial budget
 The dividend declaration
 Compensation plan approval for the
sales and marketing manager
Alternatives Courses of Action
 Financial budget approval
 Invest 7 million & 6.8 million in Ukraine in
2001 & 2002
 No or less investment in Ukraine
Financial Budget Approval
 Computing ROI, we consider the investment in
inventories and in fixed assets since they are
bearing the handling cost of the inventories for
their distributors and planning to invest in a
warehouse for this purpose.
 case1-Group12.XLS
 Financial Budget Approval

1998 1999 2000 2001 2002

Marginal After-tax Profits 924 2883 1797 1280 1163

Investment in Accts.
Receivable 283 2443 1385 9008 8611

Return on Marginal
Investment in Receivables 327% 118% 130% 14% 14%
Dividend payment
 Dividend payment
 Pay75% dividend
 Pay 50% dividend
 Pay 25% dividend
case1-Group12.XLS
 Dividend payment

25% 50% 75%

2001 2002 2001 2002 2001 2002

Net profit after tax 3524 3743 3524 3743 3524 3743
Dividend 881 936 1762 1871 2643 2807

Retention of earnings 2643 2807 1762 1871 881 936

Shareholders equity 31033 33840 30152 32023 29271 30207

ROE 11.36% 11.06% 11.69% 11.69% 12.04% 12.39%

Sales & marketing manager
compensation plan
 €48,500 basic salary & .6% of
commission on annual sales increase
 No change in salary
 Sales & marketing manager
compensation plan
Enterprise Value
Forecast (without increasing
compensation) 53368
Forecast (with increasing
compensation) 52779

 case1-Group12.XLS
 Recommendations
 Tighten Capital expansion in Ukraine
 No salary raise for the sales manager.
 Dividend payout to at 75%