Star River

Electronics Ltd.
Acuña, Ma. Zairah M.
Baccay, May Ann P.
Balbontin, Pamela J.

November 21, 2017

Company
Background
 Star River Electronics had been
Starlight founded as a joint venture between
Electronics Starlight Electronics Ltd., United
Ltd. Kingdom, and an Asian venture-capital
firm, New Era Partners.

Star River
Electronics
Ltd.
Joint venture
New Era
Partners
Mission
To manufacture CD-ROM’s as a
supplier to major software companies.

Singapore
Star River Electronics
and the Optical Disc
Manufacturing
Industry
 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 1990’s, the high demands for CD-ROM lead
to more competitors to the market, which caused a huge price competition
(cutting down prices by 40%), and 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 DVDs 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%.

Star River had begun to experiment with DVD

manufacturing, but DVDs still accounted for less than 5
percent of its sales at fiscal year-end 2011. With new
installed capacity, however, the company hoped to
increase the proportion of revenue from DVDs.
SWOT Analysis
Weaknesses Strengths
- Company’s dependency on debt in - Star River’s Income Statement has
order to fund its operations and its low been stronger than its Balance Sheet.
liquidity ratios while taking into

S
account the purchase of the packaging - It gained fame in the industry for
equipment. producing high quality DISCS.

- Inventory control - The popularity of optical and

multimedia products created rapid
- Costs more to pay employees who
Star River growth of the CD ROMS.

W T
work more than usual working hours.

Electronics
Opportunities Ltd. Threats
- Can develop a wider market for the - With many of its competitors in these

O
product sales of CDs room in each products can result in things that
country. could hurt the company that will lead
to sales declines, which will cause
- Can produce not only on the product losses to the company.
CD ROM, but for other multimedia
products.
Understanding the problems

01 Review historical performance of the firm

02 Forecast financing requirements for the next two years

03 Exercise the forecasting model to identify key drivers

assumptions

04 Estimate Star River’s weighted average cost of capital

05 Analyze a proposed investment in a packaging machine

Initial
Assessment
An initial look at the ratio analysis reveals that the annual sales-growth rate has been holding
around 15%. This is perhaps the only good news from the analysis. A performance
discontinuity makes its appearance in FY 2000 as a drop in operating margin. This was a result
of a 21% increase in production costs and expenses and a 20% increase in admin and selling
expenses. There was also an inexplicable 95% increase in inventory. This jump in inventory and
operating expenses appears to have been financed through debt, as the debt/equity and
debt/total capital ratios increased during this period. Since the sales growth rate has held
steady, there has been no draw down on the excess inventory, thus tying up considerable
capital. The ratio analysis also shows that both the current and quick ratios indicate that there
may be cash-flow problems in the near future. The company appears to be experiencing a
sharp reduction in efficiency, and to be financing that inefficiency through debt.
Star River can only cover its interest by a little more than 2 times. This ratio has steadily decreased since 1999.

The debt to equity ratios are consistently rising year over year at a compounding at a rate of 18.1%. There was a 64% jump from 1999
to 2000.

Inventories to COGS ratios are increasing dramatically. Operating margin percentage has decreased since 1999 both of which are not a
good signs.
ROA is a measures how well the firm is using its assets to generate earnings. The ROA has in general decreased by 6.9% since 1998
compounded annually.

The ROE has increased from 2000 to 2001 which may be partly due to the decreasing equity from the increased debt in that time
period.

Debt/total capital ratio is increasing steadily which is secondary to the increasing amounts of debt.

Accounts receivable is increasing as the accounts payable. This may be one reason for the increased short term borrowing. Shortages
of cash can also cause problems for Star River paying their suppliers. This is seen in increasing accounts payable.

A significant weakness of the company lies in the fact that it needs to borrow money for current operations. This when combined with
the need for capital expenditure (new packaging equipment) may be too much for the company to handle.This indicates that
current cash flows are unable to handle the daily financial needs of the company.
Overall the company’s financial position is risky. They are taking on too much debt while making large capital expenditures. This in
combination with delays in payments to the company by their customers (increasing AR) and increasing account payable is producing a
precarious financial position. Star River’s financial health is weak and will become weaker if it decides to borrow money to acquire new
equipment.
ASSUMPTIONS

Assumptions in the case Our own Assumptions

❖ Sales growth rate = 15% ❖ Sales percentage method

❖ Capital Expenditures of SGD ❖ Dividends to all common

54.6 million for DVD shares keep consistent
manufacturing equipment
and spread out over the 2 ❖ Long Term Debt the same
years as in 2001

❖ Depreciation over 7 years

❖ Corporate Tax is 24.5%

Income Statement
Forecast 2002 & 2003
Balance Sheet
Forecast 2002 & 2003
 Key Drivers Assumptions
➢ Sales growth, as the trend shows
sales has been increasing hence
the new CEO Adeline Koh should
maintain and ensure she strives
so as to compete with the new
technology.
➢ CD ROM technology has been
outdated hence CEO should think
of acquiring new machines and
change products which can go
with the new technology changes.
➢ Working Capital is also one of the
areas that should be considered
so as to keep the business
sustainable.
➢ Investors should be requested to
put more funds to operate the
business instead of borrowing and
use loans into the capital
expenditures.
Star River’s
Weighted Average Cost of Capital
Star River’s
Weighted Average Cost of Capital
Star River’s
Weighted Average Cost of Capital
Star River’s
Weighted Average Cost of Capital
Star River’s
Weighted Average Cost of Capital
Proposed Investment in
Packaging Equipment
Recommendation
Star River should hold off on the purchase of the new packaging machine because it will
save them SGD 179, 274. They can use the money to payback 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.

Star River needs to announce new policy for accounts 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.

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.
 The Team

Acuña, Ma. Zairah M. Balbontin, Pamela J. Baccay, May Ann P.