Answer

1. Cineplex Inc is one of Canada’s largest companies in entertainment industry and it operates several movie theatres, gaming, food services and online home entertainment content. Cineplex Entertainment LP, a subsidiary of Cineplex Inc, operates 162 theatres in all ten provinces in Canada having a total of 1,640 screens with over 71 million guests annually.

Porters Five Forces

Threat of Entry

The entertainment industry is characterized by highly competitive products that are dynamic and costly to produce (Porter, 1996). Cineplex has over 1642 screens across all the ten provinces in Canada. Profitable markets generally attract new entrants and profitability in the market is reduced. Cineplex however has a very strong presence in Canada and the huge number of cinema screens it has in the Canadian market ensures that it enjoys major economies of scales and its grip in the market provides little opportunity for other places to succeed in the market.

Industry Rivalry

The number of competitors in the Canadian entertainment market especially in the movie market is not a threat to Cineplex. The company offers differentiated services in almost all the provinces in Canada.

Bargaining Power of Buyers

It is the assessment of the market and the possibility of buyers to drive down commodity prices. The ease of the customers dictating the prices of products in Canada in the entertainment industry is limited as Cineplex has a strong presence in Canada and the buyers are many in the market.

Bargaining Power of Suppliers

The nature of the industry that Cineplex is involved in makes it difficult for suppliers to drive up prices. Cineplex plays a major role in distributing home entertainment in Canada and its relative size and huge presence in Canadian market and the nature of its main products makes it possible for the company to deal directly with film producers globally Prahalad and Hamel, 1990). However the suppliers of other products like feedstuff can manipulate the market by increasing food prices however Cineplex would retain its profit margin and pass on the extra increment to consumers.

Threat of Substitutes

The existence of substitute in the market is real as potential clients have the alternatives of  watching movies at home or in other entertainment joints however the attractiveness of the market is that Cineplex owns most of the best entertainment places in Canada and the company provides other diversified services such as gaming, food services and online home entertainment content.

2. The financial performance of Cineplex in the last financial year has not been impressive. Though the sales revenue increased by 5.4% in the year 2014 compared to 2013 the net profit decreased by 8.7% for the same period. The revenues in 2014 were CAD $ 1,234,716,000 compared to CAD $ 1,171,267,000 in 2013.The shareholders equity also decreased by 2.2% in 2014 from CAD $731,849,000 to CAD $748,272,000 in 2013.

The liquidity of Cineplex is alarming as the current liabilities are more than the current assets. The company has inadequate resources to meet its current obligations. The standard ratios for liquidity are mostly 2:1 for the industry (Drucker, 1999). The current assets should double the current liabilities. For every current liability the current assets should cover it twice (Garrison, Noreen & Brewer, 2009). But the ratios are 0.45:1. Cineplex current assets are less than half the current liabilities. Whereas the current liabilities increased by 5.3% in 2014, the current assets decreased by 4.5% for the same period.

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Liquidity ratios (Current Ratio and Quick Ratio)

The reasons why i chose the current and quick ratio was to gather the details concerning Cineplex financial liquidity. The current ratio indicates how liquid a company is and if it can be able to honor its current obligations. They indicated that Cineplex are unable to honor all their current financial liabilities. The current ratio is 0.45:1 while the quick ratio is 0.5:1.

Gearing Ratios (Times Interest Earned and Debt to total Assets)

I chose these ratios to find out the solvency of Cineplex. The Times interest ratio indicates that Cineplex Inc can pay its interest 4.5 times in a year but it indicates a decrease from 2013 which was 11.2 times. The debt to total assets is 0.55 while in 2013 it was 0.52. The Return on Equity shows how profitable the company is.

Profitability Ratios (Profit Margin on Sales, ROE and Asset Turnover)

These ratios indicate the profitability of Cineplex and returns that the investors can earn when they invest in Cineplex. For example for every dollar invested in Cineplex assets it earns 0.59 dollars per year.

Asset Management Ratios (Total Asset Turnover and fixed assets turnover)

The total asset turnover indicates how Cineplex manages its assets. The sales are 4.47 times more that its average total assets (Vance, 2003).

Efficiency (Inventory Turnover Ratio and Total Assets turnover)

The inventory turnover show how efficient the company is when it relates to its stock turnover. Cineplex stock turnover is 56.7 times in a year (2014) and which represents an improvement from 55.4 in 2013 while the total assets turnover was 0.77 from 0.74 in the previous year.

Value Ratio

Value ratios indicate the value of the investment in terms of earnings. Cineplex earned 1.2 dollars per share in 2014 (Bodie, Kane & Marcus, 2008).

5. I can apply trend analysis to determine the financial performance of the company

For example the financial trend indicates that Cineplex liquidity decreased by 9.3% in 2014 compared to the year 2013 while the quick ratio decreased by 9.98%. The inventory turnover increased by 2.36% while interest cover decreased by 59.65 % (Ross, Westerfield& Jaffe, 2013).

6. The cash flow is an efficient way of evaluating a company’s liquidity. Companies may indicate huge profits but are all on debtors’ accounts (Luenberger, 1997). The net cash flow shows the money available in a company’s bank account. The cash flow is prepared on cash basis while the income and expenditure is prepared on accrual basis. The Cineplex cash flow indicates net cash flows of (1202). The income statement does not reflect the true position of Cineplex as it has more current liabilities that its current assets (Johnson, Whittington and Scholes, 2011).
7. Cineplex has great potential of turning over its current liquidity crisis by decreasing its debts and increasing its liquidity by selling some of its assets (Khan, 1993). It has a lot of fixed assets but it cannot discharge all its obligations in case of an emergency. Base on the current information Cineplex is not performing well and it may be insolvent if its liquidity crisis continues. I would not invest in the company now but perhaps in future.