Analyze the financial aspects of Creative using financial theories Essay Example

of user-friendly products including Sound Blaster cards, Portable media players, MP3 players and PC peripherals. These products come with warranties and instruction manuals to help customers operate them. Creative also offers customer support and product software updates. Their pricing strategy is based on competition and includes promotional and psychological pricing strategies. There are currently three CREATIVE stores for customers to purchase from.

The biggest store of Creative is located at International Business Park and serves as both a research and customer service center. There are two other branches in the city area, namely Plaza Singapura and Marina Square. The color scheme of black and white has been chosen to highlight the elegance and sophistication of all three stores.

Typically, Creative's stores receive 400 to 500 customers on weekdays and an increased number of 1000 customers on weekends. To advertise its products, Creative utilizes various methods such as publishing ads in newspapers and magazines, receiving journalist appraisals for new products, distributing brochures at road shows and retail outlets, conducting periodic sales promotions for short-term sales boost. Also, it sends promotional emails showcasing the latest products and offers to consumers subscribed to its mailing list.

Financial Analysis encompasses Common Size and Comparative Income Statement, Horizontal Analysis, and Balance Sheet. Specifically, when comparing the total current assets of 2005 and 2006, it was noted that while there was a decline in the overall amount from 2006 to 2005, the proportion of current assets in 2006 increased to 76% from 73% in 2005.

According to the financial report for 2006 (refer to appendix financial report 06 pg 2 ; article 3), Creative's cash increased by over $100 million from the compensation

from Apple settlement, resulting in a higher percentage of cash and cash equivalents in their total assets compared to the previous year. Conversely, the actual amount and percentage of other assets had decreased. In comparison to the previous year, the company had less cash and more accounts receivable, while in 2006, they had more cash and less accounts receivable in their current assets. This indicates that fewer companies owed Creative money in 2006 than in 2005. Although the amount of accounts receivable for 2006 had decreased, it still accounted for a slightly higher percentage of total assets than in 2005. The decline in account receivable may have been due to Creative offering cash incentives or discounts to purchasers who bought stock on credit.

By offering cash incentives, the company could entice debtors to timely return their debts in cash, ultimately reducing the amount of bad debts. The inventory for 2006 decreased noticeably in terms of both the actual amount and overall percentage of total assets. The decrease was in line with management's efforts to maintain a lower inventory balance and was likely due to factors such as excess and obsolete inventory, including the write-down of flash memory inventory, and low demand from the market. (Refer to Appendixes Financial Report 06 pg 2 for further details.) Although there was a decrease in the actual amount of property and equipment, the percentage for 2006 increased compared to 2005, likely due to other asset categories decreasing in percentage for 2006. In 2006, the total assets' actual amount decreased, possibly due to the significant reduction in fixed assets and inventory.

In 2006, Creative experienced a drop in investments, both

in actual amount and percentage, as a result of SigmaTel's initial public offering. This led to a decrease in Creative's ownership percentage in the company, despite not disposing of any shareholdings during the IPO (see Appendix Financial Report 06 pg 14). Despite an increase of 2% in percentage, the actual amount of current liabilities decreased due to paying off accounts payable, accrued liabilities, income taxes payable and current portion of long-term obligations. The total liabilities decreased resulting in a higher percentage (25%) of long-term obligations compared to 2005. There was a significant increase in share capital reflecting Creative overcoming negative market conditions for MP3 digital audio players during the year.

According to page 2 of the appendix financial report and article 5, competition in the MP3 market was intense in 2006 and caused prices to decrease, resulting in lower gross margins. Despite a slight decline in sales from the previous year, cost of goods sold increased from 77% to 85% of total sales based on the income statement. Additional expenses were incurred but deferred share compensation or extra paid-in capital payments were not made. Both unrealized holding gains on investments and retained earnings decreased in actual amount and percentage, leading to a decline in total shareholder equity along with total current liabilities. As a result, there was a decrease in both total liabilities and shareholder's equity.

The rise in cost of goods sold was caused by competitive pricing strategies in the MP3 audio player market. This led to a decrease in gross profit margin due to a significant write-down of flash memory inventory during fiscal year 2006's third quarter, which was triggered by lower flash memory prices

and market uncertainty. The lowered selling prices of digital audio players further impacted gross profit negatively as it resulted in decreased sales. Consequently, overall gross profit for that year declined compared to 2005 despite more sales but lower overall gross profit resulting from higher gross profit margins. Operating expenses remained comparable for both years; however, the reduced gross profits resulted in significant operating losses observed in 2006 compared with the previous year when there were significantly higher gross profits earned both overall and as percentages despite lesser production and product sales at much lower prices which eventually resulted as operating income loss (refer to appendix financial report 06, pg.2).

In 2006, the aggressive pricing and competition in the MP3 market resulted in severe pressure on gross margins and led to a heavy net loss for the year. Despite increased sales, operating expenses exceeded the low amount and percentage of gross profit, leaving the company unable to cover costs. Additionally, decreased investments led to a drop in investment gains, further contributing to the net loss for the year. Overall, the low gross profit margin earned in 2006 resulted in a much heavier net loss than the net income earned in 2005. This was primarily due to the high percentage of cost of goods sold in 2006.

4.2 Comparative Common SizeHorizontal AnalysisBalance Sheet
In 2006, there was a 14% rise in cash and cash equivalents compared to the previous year, while the account receivable decreased by up to 18%. This indicates that Creative made an attempt in the year 2006 to increase cash collection and reduce the amount of accounts receivable

from debtors.

In 2005, Creative managed to collect outstanding debts from companies in financial difficulty while also offering cash discounts to prompt payment from stock buyers. This approach reduced the amount of bad debt on their books and helped them achieve a 41% reduction in inventory levels in 2006. As shown in the appendixes financial report on page 16, this was part of the management's strategic plan to maintain lower inventory balances. Creative also began to clear their stock, possibly due to write-downs on flash memory card and fierce competition in the MP3 audio player market. Additionally, they were able to pay off many of their advanced debts, resulting in a 23% increase in other assets and prepaid accounts from 2005.

In 2006, Creative experienced a decrease in inventory and accounts receivable, resulting in a 20% reduction in the total current. Additionally, there was a decrease in property and equipment, net, investments, and other non-current assets due to Creative's decreased ownership percentage in SigmaTel after its initial public offering. While no shareholdings were disposed of during this period, Creative observed a decline in these assets (see appendix financial report 06 pg 14). As a result, the total assets fell by 23% compared to the previous year.

The company experienced a 19% reduction in total current liabilities, which was primarily caused by lower accounts payable, accrued liabilities, income taxes, current portion of long-term obligations, and other types of liabilities. The significant drop in accounts payable by 31%, along with a decline in the current portion of long-term obligation by 36%, and other types of liabilities contributed to this decrease. However, cash used in operating activities as mentioned

in appendix financial report 06 on page 16 offset this reduction. The lowered income taxes were due to multiple tax jurisdictions across different countries and were converted into USD at a lower rate because of currency translation into US dollars as explained in appendixes article 6.

To counterbalance the net loss for that year, $290,188 was invested as share capital resulting in an increase of approximately 3502%. Additionally, reduced investments during that period resulted in fewer unrealized holding gains causing about a 70% decline in unrealized holding gains on investments.

Despite a decrease of 86% in the company's retained earnings caused by a decline in net income for 2006, there was an overall reduction of 23% in both liabilities and shareholder's equity compared to the previous year. The fiscal year 2006 income statement indicates that sales resulted in a net loss of $118,747,000, leading to a staggering drop of 20,195% in net income percentage.

Despite a 1% increase in cost of goods sold, net sales decreased by 8%, primarily due to significantly reduced flash memory card prices in the latter half of the fiscal year. This led to lower selling prices for digital audio players and an overall decline in net sales, as detailed on page 2 of the appendix financial report 06.

Although operating expenses decreased, weakened sales and lower selling prices for digital audio players resulted in a gross profit drop of 40%. The decrease in flash memory prices is explained on page 2 of the same report. However, there was an improvement with regards to operating losses as they dropped by 112%. Furthermore, other charges saw a significant reduction of 43%, which can be attributed to

$37.

In the financial report for 2006 (see appendix, page 5), it is noted that there was a $3 million charge. This charge included a $31.4 million impairment charge pertaining to the goodwill and other intangible assets of 3Dlabs. Although there was a low gross profit, the operating expense remained unchanged in order to continue selling goods, as they are viewed as fixed expenses. This resulted in a loss for the operating income. Additionally, gains from investments were 75% lower than before because Creative made fewer strategic equity investments in companies that could offer technological products to provide a competitive edge in the market (refer to appendix financial report 06 pg 12). Interest expense in fiscal year 2006 was 156% lower than in fiscal year 2005 because of the five-year $175 plan.

During December 2004, the company obtained a syndicated term loan worth $175.0 million, with $100.0 million being utilized immediately and the rest withdrawn in February 2005. Consequently, interest income increased by 75% due to the surge in cash and cash equivalents. However, a net loss resulted from the elevated cost of goods sold as gross profit fell short of covering other operating expenses. Despite gains from investments and additional interest income, they were inadequate to offset the loss.

According to the trend analysis of Creative, the cost of goods sold was increasing at a faster rate than sales, leading to a gradual rise in gross margin. Despite a drop in sales causing the gross margin percentage to decrease in 2003, it recovered and reached its highest point in the following year. However, there was a decline of 2% in the gross margin percentage by 2005 and

it further dropped to just 63% by 2006 - marking the lowest proportion recorded over five years.

Despite having the lowest gross margin in 2006, this year had the highest cost of goods sold among the other five years with a rate of 177%. The decline in contribution margin during this period is due to a notable decrease in flash memory card prices that occurred in the second half of the fiscal year. As indicated by appendix financial report 06 pg 2 and article 6, this resulted in lower selling prices for digital audio players. Although operating income slightly decreased in 2003, it was because operating expenses were reduced correspondingly with a slight decrease in gross profit.

Sales and cost of goods sold saw a significant rise in 2004, resulting in the operating income reaching its highest point in five years at 158%. The following year, however, witnessed a sharp decline with an operating loss of 244%. This was due to the increase in sales being outweighed by the cost of goods sold leading to a reduction in gross profit. Additionally, there was an extra charge of $65,225 imposed and overall operating expenses were higher than previous years. As a result, despite higher costs of goods sold and lower sales figures, the operation loss reached its peak in 2005 with a decrease of 518%.

Despite a notable rise in net profit between 2002 and 2004, where there was an increase of 100% in 2003 followed by an additional surge of 681% in the subsequent year, the operating expense remained high. This caused a decline in gross profit compared to the past four years due to low sales

and high cost of goods sold. However, there was a significant decrease in net income during both 2005 (3%) and 2006 (-599%), which marks the worst net loss over five years. The reduction of net income for 2006 can be partly attributed to poor sales and high cost of goods sold causing reduced gross profit despite other expenses and income offsetting.