Question

Fuling Plastics: A Fork in the Road

This discussion addresses the following Module Outcomes:

Evaluate a firm’s use of leverage using financial statement analysis.

Evaluate trends in the firm’s pattern of operations using financial statement analysis.

Evaluate the financial position of the firm using time and trend or peer-group analysis.

Fuling Plastics USA is a subsidiary of Fuling Global, Inc. (https://ir.fulingglobal.com) Fuling manufactures environmentally-friendly plastic food-service disposable products. Their historic strength has been in the production of disposable cutlery, the quality and value of which has satisfied the exacting requirements of large, sophisticated, multinational purchasers that have decades of experience sourcing foodservice disposables. Fuling has built on that strength to deliver drinking straws, cutlery and serviceware, such as cups and plates, to customers around the world. However, their largest customer base is in the United States, which accounts for more than 90% of their revenues. Fuling has been in discussion with Bunzl Distribution USA, which owns and operates more than 100 warehouses that serve all 50 states and Puerto Rico, as well as Canada, the Caribbean and parts of Mexico. Bunzl Distribution controls more than 4,000 employees and 400,000-plus items in stock at any time.

For purposes of this discussion, assume that you are the finance manager for Fuling Plastics, USA. In speaking with other managers, the firm's chief executive officer (CEO) has determined that substantial opportunities for growth exist. You have been invited to discuss Fuling Plastics, USA's financial ability to take advantage of these opportunities. You are aware that acquisition of Bunzl’s supply chain abilities and existing assets are seen as an important strategy in managing Fuling Plastics’ growth rate. Assume that current sales are $1,000. Fuling Plastics USA growth may exceed 50% in the upcoming year, and the Bunzl partnership may help alleviate the need for an expansion in fixed assets through other means. Using a percentage of sales methodology, assume that Fuling’s net fixed assets are a fixed percentage (180 percent) of its sales, while costs are a fixed 80% of sales, so the firm’s profit margin is constant. The company hopes to achieve at least a 25% growth in sales in the coming year. At the current level of sales, with Bunzl additions, capacity utilization will stand at 80%. Assume that Fuling maintains a fixed dividend ratio of 33.3%. Assume that current liabilities do not vary spontaneously with sales; we will disregard the effects of depreciation.

(Table 1: Fuling Data) 50% Increase in Sales, Given:

Current Sales: $1,000

Current Assets (Ratio to Sales): 20%

Increase in Liabilities and Owner’s Equity: $225

Net Fixed Assets (Ratio to Sales): 180%

Costs (Ratio to Sales): 80%

Profit Margin: Constant

Existing Priorities: Leave total net working capital unchanged and keep dividend payout ratio constant

Tasks

A. Compute and evaluate Fuling’s external financing needed (EFN) in the event that sales grow 25% in the upcoming year and explain each factor which the company must consider in planning for this level of growth. Specifically, consider capacity utilization and external financing needed.

B. Compute and evaluate Fuling’s options in the event that sales subsequently grow an additional 50% and the firm wishes to maintain current assets at 20% of sales, explaining which components of its financial policy the company must consider in planning for this level of growth. Specifically, consider profit margin, dividend policy, financial policy, and total asset turnover.

Responses should comprise 200–600 wordcount.

Answer 1

Current level of sales
Income statement
Sales(S0)	1000
Less: Costs*80%*1000)	800
Net Income	200
Less: Dividend 33.3%*200	66.6
Retained earnings	133.4
Balance sheet
Liabilities		Assets
Liabilities(Bal.fig.)	1867	Current assets (20%*1000)	200
Retained Earnings (from above)	133	Fixed assets(180%*1000)	1800
Total	2000	Total	2000

A…..25% growth in sales
Income statement
Sales (1000*1.25)	1250
Less: Costs(80%*1250)	1000
Net Income	250
Less: Dividend 33.3%*250	83.25
Retained earnings	166.75
Balance sheet
Liabilities(1867+225)	2092	Current assets (20%*1250)	250
Retained Earnings (133+167)	300	Fixed assets(remains same)	1800
Ex.Funds Needed (Bal.fig.)	-342
Total	2050	Total	2050
So, no EFN (Result negative)

B……… FURTHER 50% growth
Income statement
Sales(1000*1.25*1.5)	1875
Less: Costs (80%*1875)	1500
Net Income	375
Less: Dividend 33.3%*375	124.88
Retained earnings	250.13
Balance sheet
Liabilities(1867+225)	2092	Current assets (20%*1875)	375
Retained Earnings (133+167+250)	550	Fixed assets(1800/100%*150%)	2700
Ex.Funds Needed (Bal.fig.)	433
Total	3075		3075
It is the fixed asset capacity that needs to be considered in B above as sales forecasted has exceeded the full capacity sales of 1000/80%*100%= 1250   & the fixed assets at this level of sales is   $ 1800 --which will suffice as long as the growth in sales are upto $ 1250.
Any further growth in sales, as in B ,requires, additional investments in fixed assets, which requires external financing of $ 433