Diagnosis And Research Of Weakening Profitability In CS Company

CS is a public listed company in the business of digital vision and information.It has been providing vision and information products and operational services since it was established 21 years ago.Facing the impact of crossover competition in this digitalization era,CS has aggressively reformed its strategies.CS had doubled its operational sales during the period from 2006 to 2009,with a return on net assets at around 10%.It had been recorded a straight-line decline on indicator of profitability,with a stagnant sales of 2 billion or so,from 2010 to 2013.In the same time,the yearly return on net assets were-11.8%,2.01%,11.27% and 2.7%.When it came to 2014,it was recorded a loss at 0.4 billion,or-39.56% as return on net assets.No more loans from banks.The creditors concerned about CS's ability to repay its debts.As a result,the cash flow was broken,and the executives left.The root causes contributing to this poor performance need to be analyzed immediately.In this circumstance,on the basis of field survey in CS,with reference of relevant research essays,both overseas and domestic sources,with applying finance analysis tools,such as,Radar Analysis,DuPont Analysis,Circulation Substitution,Structural Analysis,in the meanwhile,having interviewed the management,I have studied the operation situation and profitability for those latest 5 years.The conclusion is the root cause is either external business environment or business strategy,but operational management.First of all,the sales have been dropping dramatically.From 5 year ago,CS started to invest heavily on new business as part of strategy transformation.However,the new businesses have been failing to generate a scalable sales and profit.Secondly,CS had to abandon some mature businesses due to lack of working capital.Furthermore,excessively high cost to procure raw materials.Higher cost and expenses for those newly investments.The product R&D has failed to achieve design-for-cost.Meanwhile,the purchasing activities have been supposed to procure the materials with more competitive prices.Thirdly,quite weak control over cost and expenses.The higher labor cost has not been translated into better operational performance.Insufficient assessment of potential profitability for those new R&D projects.Ineffective control over cost for those R&D activities.Fourthly,the low turnover rates for both working capital and inventory.Have been authorized the clients with excessive credit.As a result,huge amount of overdue receivables generated.Some excessive materials have been purchased due to order cut or cancellation.Fifthly,financing.Have been using short term leverages to invest long-term projects.Having been heavily relying on loans from banks.The fact was the operational profit rates were lower than cost of capital.Based on this diagnosis,some suggestions for improvement are made.CS should focus on its key business – Set-Top Box.Re-assess the financing situation of investment on Internet-type business,as a transforming strategy.Better coordination between R&D and purchasing activities to achieve the purpose of cost down.Be aware that cash flow is vital,as a foundational element and aim for making profit.Lay off those excessive human resource and close or sell those non-profitable sectors.Re-structure salary plan and work out an effective incentive plan,so as to improve the individual and organizational performance.Tighten the policy of credit authorization for clients.Control stringently over overdue receivables.Just-in-time materials procurement,no excessive or dead materials allowed.Diversify financing channels,no more short-term financing capital used for long-term projects.Hope this diagnosis and research report can provide some ideas for CS's management to improve its profitability,and finally step out this difficult situation with a sustainable and healthy future.