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Case Analysis: Financial Condition of AlberCan Drilling Supply Company
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Case Analysis: Financial Condition of AlberCan Drilling Supply Company
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Company History

Businesses find themselves in need of extra capital even if they are making profits. There are two major ways through which these businesses can raise additional capital for their businesses. These methods include equity and debt capital. Equity capital is where a company divides its ownership into small units called shares (Ahuja, Narender). These shares are sold to various people at a predetermined fixed share price in order to raise capital for the business. The shareholders own a percentage of the company and they have various rights as outlined in the companies act. They benefit from the companies` dividends when a company makes profits. Another method of raising capital for businesses is the debt capital financing. This is where a company or organization borrows funds from a financial institution or an individual and repays it later at an interest. Debt financing is used by most companies as most of them do not want to lose control of their ventures by sharing ownership (Mullins, John).There are various advantages and disadvantages of using either of the methods. This paper analyzes the reasons why MacDonald needs to borrow to support his growing business. The problem that MacDonald is facing in this case is mainly due to overstocking hence leading to cash flow problems for the company. MacDonald has a variety of other options that he can exploit in order to raise capital. One of them as stated above is seeking to sell shares or by selling debentures (Bilgin, Mehmet , Hakan Danis, Ender Demir, and Ugur Can).Also contained in this paper are projected financial reports for Albercan drilling and a detailed analysis of the same.

The major reason why McDonald needs to borrow in order to finance Albercan drilling despite the company making good profits is so that the company can solve its cash flow problems. The company has fallen into cash flow problems because of its decision to increase its inventory by a very large margin. This decision has resulted in the companies` cash outflows exceeding cash inflows (Kim, Joon Ho). These cash flow problems for the company were brought about by the decision of McDonald to buy the share ownership of Mr.Kelly who decided to exit the business. Due to this reason, it is vital that ADS seeks additional investment so as to be able to run the operations of the company smoothly.

Another reason why ADC needs to borrow despite making reasonable profits is that the company has a growth plan and vision. In order to achieve this vision, it is important that the company borrows money in order to facilitate its growth and expansion plans. The company has been growing at a consistent rate over the previous 10 years and the profits have been increasing persistently. This growth however is threatened by the reduction in cash from the business as a result of acquiring the stake belonging to Mr Kelly. If the company’s growth projections are met, it will be easy for the company to repay the loans and consequently increase its profits. The investment from the loan from the bank will generate enough cash to cover the cost of borrowing. The company can increase its product portfolio and increase its stock to more diverse and modern drilling equipment.

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