AIDAN CIRCOANA Case Solution & Answer



Sidra Khan, Account Manager at VERGE Capital is considering the request of a $5000 long-term loan and a $25000 working capital loan from Urban Roots

Statement of Cash flows Analysis

The statement of a cash flow shows where a company receives its money and how it spends its money. From the statement of cash flows of Urban Roots, given in Exhibit 5, it could be seen that the firm has sufficient ending cash balance in 2018 which is equals to $22334 as compared to an ending balance of $1354 in 2017. This shows a net increase of 1549% approximately that is quite significant.

Although, this shows a very good metric for the company’s liquidity position, but it also implies that the firm is ineffective in managing its cash with a huge difference in cash balance at ending in just one year. An effective firm always maintains a minimum amount of cash necessary to keep it in a liquid position.

Along with it, cash flow analysis could be conducted by analyzing the cash flow from each category i.e. operating, financing and investing, as a percentage of net cash flow and how the cash flows has grown from 2017 to 2018. Table-1 summarizes the categorical view of cash flow statement.


Categorical View
Operating 30019 4015 143% 297%
Financing 0 3000 0% 222%
Investing -9039 -5661 -43% -418%
Net Cash Flow 20980 1354 100% 100%


From the above table it could be seen that the cash flow from operating activities has the highest percentage of net cash flow with 143% with a decline from 297%to 143% showing that despite of high ending balance in 2018, the firm’s cash flow from operations have declined. This raises the concerns for Sidra Khan over the firm’s liquidity position and ability to pay its debt obligations in future.

Ratio Analysis

A ratio analysis could be conducted to evaluate the financial performance of the firm in 2017 and 2018 and the improvement in its financial performance. From the financial ratios given in the case exhibit 4, ratios for 4 different areas has been given which could be evaluated as follows;

Profitability Ratios

One of the major profitability ratio is the Return on Equity which shows that how much the firm has in its net earnings utilizing its Equity. From Exhibit 4, he ROE has grown form 53% in 2017 to 82% in 2018 showing a very significant percentage along with growth of 31%. This shows the firm is quite profitable and is effective in managing its costs to earn higher margins with efficient use of its equity.

Liquidity Ratios

Another major area of measuring the financial performance of a firm is the liquidity position which analyzes the firm’s ability to pay its short term obligations. The frequently used liquidity ratio is current ratio which measures that how much times the firm has current assets to pay its current liabilities. Urban Roots has a current ratio of 11.2 times in 2017 and 52.2 times in 2018 showing an unrealistic liquidity position as the optimal liquidity ratio is 2. The highly liquid position of the firm analyzed by current ratio increases the votes for granting loan to Urban Roots.

Efficiency Ratios

Another major area of financial performance analysis is efficiency ratios which shows that how efficiently the firm manages its operations in terms of receipts from customers, payments to suppliers etc. From cash Exhibit 4, it could be seen that the age of receivables and payable equals to 17.9 and 22.6 days. This implies that the firm is ineffective in managing its trade receivables as the firm pays to its suppliers more quickly than it receives from its customers……………………

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