European Automotive Industry Profitable Business Companies

Question: Discuss about the European Automotive Industry for Profitable Business Companies. Answer: 1: The main reason why profitable companies like Jackson Automotive cannot repay their loans in time is associated with the fact that what they have been earning and producing have not been at enough rates to enable them cover the cost, operate, and manufacture effectively and in a timely manner (Lin, Prabhala, and Viswanathan 2013, pp. 26). This situation makes companies to be deficient of cash flows and thereby affecting their smooth operations. Even though Jackson Automotive is a profitable and a reputable company, it has not been able to repay its debts on time due to two major developments that took place in the company between August 2012 and May 2013. The first development was repurchasing of stock at $ 10,000, which made up 65 % of the total use of funds in the company (La Cava 2013, pp. 13). Stock worth $ 5,000 was repurchased with the amount borrowed from the bank (bank loan) as the source of funds, and this led to an increase in debt ratio of the company in two fold from its level of 23 % in August 2012 to a level of 43 % in May 2013 (Banks, Marston, Russell, and Karger 2015, pp. 38). In addition, this action also affected the debt equity ratio of the company, which increased to 1.8 in May 2013 from a level of 1.3 in August 2012 (Said 2013, pp. 162). This indicates that Jackson is becoming insolvent as it raising less equity and taking more debt (Drescher 2013, pp. 23). As such, this has made it more difficult for Jackson to recover the interest expenses on the loan or to make the loan payments. The second development that took place was that Jackson purchased momentous amount of inventories, which was equivalent to 33 % of the total funds used by the company. This made the current ration of the company to change to 1.4 in May from 3.0 in August indicating that the ability of Jackson has decreased and it was now more liquid than it was before (Sarkar 2016, pp. 4). In addition, the acid ratio of the company decreased to a level of 0.6 in May from a level of 1.7 in August. Even though a ratio of 0.6 is good enough for an automotive industry, it still affects the ability of Jackson to repay its loan (Bansal 2014, pp. 160). The sources and uses of funds statement shows the money need for all purposes in a company and where the money is going to come from (McKinney 2015,pp. 24). The sources and uses statement for Jackson Automotive Company for the period between August 2012 and May 2013 is as shown below. Uses of Funds Inventories $ 82,932 Accumulated Depreciation $ 309,080 Accounts payable $ 53,589 Notes payable, bank $ 45,000 Accrued taxes $ 2,183 Other accrued expenses $ 14,178 Customer advance payments $ 15,553 Total Uses of Funds $ 522,515 Sources of Funds Stakeholders' Equity $202,396 Total to be financed $320,119 Total Sources $522,515 2: Jackson Automotive is among the very successful companies, which are still trying to surmount the economic downturn of the year 2008 in order to get themselves back to their previous successes. Jackson Automotive, being in Michigan, has competed so well against the three major automobile manufacturers (Murfin and Petersen 2016, pp. 30). It has been conventionally operated by Edwards and it has not had to bear any debt since the year 2004. However, what it has been earning and producing has not been at enough rates to enable it cover the cost, operate, and manufacture effectively and in a timely manner (Bamber 2015, pp. 76). As such, the company needs to borrow a new loan from the bank. The additional borrowing was urgently needed to help Jackson Automotive to clear its unfulfilled backlog of customers orders. According to Allen, Kramadibrata, Powell, and Singh (2013, pp. 21), even though Jackson Automotive had in the past borrowed some amount, which it could not pay back in time because of the financial crisis, it still faces tough economic times and delays in the order fulfillment and these have resulted into less cash flow into the company. As such, it urgently needs to borrow money from the bank to help it fix this situation. This is because in the event it fails to fix this situation, what it may face is loss of business because of failure to fulfill orders in a timely manner. This may make customers to start looking for new suppliers. In addition, the loan was urgently needed because the events that transpired between August 2012 and May 2013 that were caused by inadequate cash flows made it to lack funds for repurchasing stock (Dunn, Ledford, Jackson, and Wood 2014, pp. 607). As such, it was forced to have a backlog of unfulfilled orders from the customers, which was about 90 % of the annual capacity of the company (Hes and Polednkov 2013, pp. 29). As such, it was prudent for the Jackson Automotive to urgently borrow money from the bank to prevent if form losing its business. Reference Allen, D.E., Kramadibrata, A.R., Powell, R.J. and Singh, A.K., 2013. Default Risk in the European Automotive Industry. International Review of Business Research Papers, 9(1), pp.22-37. Arnold, G., 2014. Corporate financial management. Pearson Higher Ed. Bamber, G.J., 2015. Work systems and employment relations in the Australian automotive manufacturing industry. Members-only Library. 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