Submitted by: Group No.

X1

Submitted to:
Prof. Ekta Sikarwar
FMT-2 (Jan-Mar2016)

PGP I, Section: 4
Session Write-up

January 16, 2016

GEMINI ELECTRONICS

The case: This case is about analyzing the financial status of Gemini Electronics.
The company: Gemini Electronics was a U.S. - based manufacturer of televisions. The company was founded in
2002 by Frank Wang. Gemini produced its TVs on a just-in-time basis which help them to keep the price low.
This strategy helped Gemini to achieve a market share of 35%. Gemini had initially undertaken equity financing
with Venture capitalists accumulating a 45% stake in the company. Now Wang wanted to retain control of the
company and decided to finance its future growth with debt.
The Issue: Whether Gemini Electronics should go ahead with its debt financing model?
Case Analysis: We have calculated the required ratios using the balance sheets and income statements of Gemini
Electronics.
Liquidity Ratios

CURRENT RATIO
CASH RATIO

2008
2.51
0.63

2009
2.55
0.60

INDUSTRY AVG (2009)

2.84
0.05

Gemini Electronics had an excellent cash ratio as compared to the industry average although it had slightly
reduced in 2009. The current ratio had improved slightly to 2.55 in 2009 but was less than the industry average of
2.84. But for debt financing requirements it met the criteria.
Turnover Ratios

PARTS INV TURNOVER IN DAYS

WIP INV TURNOVER IN DAYS
FG INV TURNOVER IN DAYS
A/R TURNOVER IN DAYS
A/P TURNOVER IN DAYS
CASH CONVERSION CYCLE
FIXED ASSETS TURNOVER
TOTAL ASSETS TURNOVER

2008
46.82
3.29
70.73
39.83
45.25
115.43
5.34
1.46

2009
46.04
3.36
69.36
40.16
41.78
117.14
4.06
1.37

INDUSTRY AVG (2009)

32.26
7.89
188.33
30.44
11.11
192.81
2.42
1

Gemini Electronics had a higher parts inventory turnover ratio wrt the industry but this was because of the need to
source many of the parts from Asia which forced them to keep higher inventory levels. But because of their justin-time process they had significantly lesser turnover time for WIP and Finished goods respectively. Their A/P
turnover was good and within the 60 days limit that their suppliers imposed. As a result they managed to convert
goods into cash at a faster rate than the industry average.

Debt Management Ratios

DEBT RATIO
TIMES INTEREST EARNED

2008
0.65
5.72

2009
0.63
4.63

INDUSTRY AVG (2009)

0.5
3.21

Gemini Electronics had a slightly higher debt ratio than the industry average but because of their superior
operational efficiency they managed to maintain a comfortable interest coverage ratio.
Profitability Ratios

GROSS PROFIT MARGIN

OPERATING PROFIT MARGIN
NET PROFIT MARGIN
ROA
ROE

2008
35.22
13.06
7.00
10.25
29.40

2009
34.32
11.18
5.70
7.82
21.17

INDUSTRY AVG (2009)

38%
7.41%
3.32%
3.32%
6.60%

Although Geminis gross margin was lesser than the industry average they manage to achieve a superior operating
and net profit margin by keeping their operational costs low. Although their 2009 performance had fallen as
compared to 2008, the company was to able to give an ROE of 21.17% which was almost 3 times the industry
average.
Through Dupont Analysis we found that the equity multiplier was 2.7 which shows that the company is using
more debt to buy assets which has resulted in a higher ROE figure.
Common size statements
Income Statement

SALES
COGS
GROSS PROFIT
OPERATING COSTS
SELLING & DISTRIBUTION
R AND D
ADMINISTRATION
AMORTIZATION
OPERATING PROFIT
INTEREST
EBT
TAXES
NI

2009
100
65.67
34.32

INDUSTRY AVG (2009)

100
62
38

7.32
5.75
7.17
2.88
11.18
2.41
8.77
3.07
5.70

10.89
7.01
8.34
4.35
7.41
2.31
5.1
1.79
3.32

As can be seen Gemini Electronics has a higher proportion of COGS to Sales than the industry average but it
compensates that by keeping its operating costs low. As a result it manages to obtain an operating profit of 11.18%
as compared to the industry average of 7.41%.
Balance Sheet

CASH
A/R
PARTS INV
WIP INV
FIN GOODS INV
TOTAL CA
L, P & E,NET
INTANGIBLES
TOTAL ASSETS
A/P
CURRENT PORTION OF LT
DEBT
TOTAL CL
LT DEBT
SHARE EQUITY
TOTAL LIABILITIES &
EQUITY

2009
14.19
15.09
12.06
0.89
18.13
60.38
33.78
5.82
100

INDUSTRY AVG (2009)

4.54
8.34
5.48
1.34
31.99
51.69
41.34
6.97
100

15.71

11.23

7.88
23.59
39.44
36.95

7
18.23
31.5
50.27

100

100

As we can see Gemini has higher ratio of cash, A/R and parts inventory in the assets as compared to industry
average. But because of its just-in-time strategy it has significantly less WIP and finished goods as a proportion of
the total assets whereas the average has a majority proportion of its current assets in the form of WIP and finished
goods inventory. On the liabilities side, Gemini has only 36.95% shareholders equity as compared to the industry
average of 50.27%. This tells us that Gemini relies more on debt financing than equity financing.
Overall we feel Gemini should go ahead with its debt financing model as it has sufficient liquidity and is a highly
profitable company. Also its interest coverage ratio is very high and provides a sufficient cushion to repay the
interest on additional debt.