Look at Creative Lab's Financial Data

I thought it was time to put to use all this information I'm learning in school and make an amateur attempt to analyze Creative Lab's latest financial filing. It hasn't been good news for the company announcing a $588,000 profit this year and a net operating loss of $68,548,000. Those are the numbers which really stand out. The troubles with the company's excess inventory have been well reported and I think overemphasized. There are bigger problems within the income statement. The largest trouble spot is the excessive growth of receivables. Accounts Receivable grew 91% while sales revenue grew 50% from 2004 to 2005. This could mean the company didn't collect the sales it made on credit and/or extended credit to distributors or retailers when the company normally would only accept cash terms. Also the allowance for bad debt only grew 2.8% representing management's confidence they will collect most of the sales on credit. The other problem with the company is the acquisition of 3dLabs. This year the company wrote off $65,225,000 in goodwill and intangible assets from 3dLabs due to performance below expectations and new product delays. In 2002, Creative Labs acquired 3dLabs for $25,806,000 net. This probably represents a loss for the company because I do not believe 3dLabs has generated $90 Million in operating profit. However the financial statements do not separate income by subsidiary. Some areas of minor concern is the product warranty and settlement increases. In 2004, the company had $4,871,000 in warranty settlements with $8,417,000 in warranties issued. In 2005, the company had $21,241,000 in warranty settlements with $27,603,000 in warranties issued. This is a significant increase in the settlement rate of the warranties. Creative also issued a $0.50 dividends ($41,357,000) during 2005 compared to $0.25 dividends for 2004 and 2003. This comes after borrowing $175 Million to pay for the net cash flow loss of $208,464,000 in operating activities. The company faces several challenges including reducing inventory and increasing gross profits, collecting receivables in a timely manner and reducing accounts receivable, managing 3dLabs more effectively and investing the loan in product research and development. If the company can overcome these challenges, they will make a return to profitability. Now comes time for the disclaimer. I do not make any warranty, expressed or implied, or assume any legal liability or responsibility for the accuracy, completeness, or usefulness of any information or represents that its use would not infringe privately owned rights. The opinions of the authors expressed herein do not necessarily state or reflect those of Creative Labs or any of its subsidiaries and shall not be used for advertising or product endorsement purposes.