Amt Case Analysis Essay

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1. What has created the need for additional finance by AMT since 1983? The need for additional financing is a result of multiple factors that placed intense pressure on available cash. The first factor is the extraordinary growth AMT has experienced the last few years with an annual sales growth rate of 52.88%. The extreme growth rate in sales was accompanied with heavy spending on research and development along with rapid expansion in the company’s sales force and other marketing expenditures. What made matters worse is the company has incurred operating losses, which meant that generating cash from operations was at best limited or insufficient. The second major factor is the inefficient use or mismanagement of some of the…show more content…
• Accounts Payable Days and Accrued Expenses also play a critical role. Days Payable is set at 50 while Accrued Expenses is assumed to be 5% of Sales. • Cash as a percent of sales is set at 7.5%. Going forward, and assuming 7.5% ratio, which is very similar to the industry upper quartile in 1985, cash balances at AMT will remains solid going forward. Note that the industry’s cash to sales ratio is not given directly but can be deducted by taking the Cash to Assets ratio of 16.3% (1985) and Assets to Sales ratio of 45.3% (Upper Quartile in 1985). Reshuffling these figures yields the industry’s Cash to Sales of 7.4%. All these assumptions about net working capital result in tremendous need for external financing over the next several years as mentioned earlier. Annual Sales growth is expected to be at high rate 30% over the next 5 years, which puts tremendous pressure on cash. Poor management of working capital will unnecessarily tie up cash, thus requiring external financing from banks such as Western National Bank. Looking at cash to sales ratio, the historical trend for AMT is very much disturbing with the last two years having negative cash balances. With the 7.5% ratio of cash to net sales, cash balances, when managed efficiently, will remain at healthy levels over the next 5 years. The above discussion shows that high growth in sales, which is typically accompanied with high growth in working capital exerts tremendous
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