Ateneo de Zamboanga University School of Management and Accountancy Accountancy Accountancy Department
ANANDAM MANUFACTURING COMPANY: ANALYSIS OF FINANCIAL STATEMENTS
In partial fulfillment of the requirements in FINANCE 211: FINANCIAL MANAGEMENT, PART I
Presented to: MR. JOHN CARLOS S. WEE, CPA MBA Instructor
Presented by: JOLINA B. BANZON ROMEL W. DELOSA MARK VENDOLF B. KONG JHON EDMAR B. LARAWAN RICHIE D. SABAC
October 16, 2017
I. Case Summary
Being the second-largest producer of garments in the world, India is home to various garment manufacturing companies which exports high quality materials all over the world. The industry has been expanding in the past year and is projected to continue blooming in the succeeding years which caused companies to undergo rapid growth. One of these promising companies is the Anandam Manufacturing Company, which experienced a drastic increase in both revenue and taxes in the past three years. The drastic increase prompted Anand Agarwhal, owner of the said company, to approach the local bank for additional funding to meet the growing requirements of the company. Agarwal discussed with the bank manager the rapid development of his company and the promising growth of the garment industry in the country. The company urgently needed the a dditional financing of Fifty million Indian Rupees to meet the cash and investment requirements of the business and to continue with smooth operations and expansions.
II. Objective of the Analysis
To properly analyze the financial health and stability of the Anandam Manufacturing Company through interpretations made from financial ratios of which information was derived from the company’s audited statement of profit or loss and audit ed statement of
financial position of the said company as shown in the exhibits 1 and 2. The interpretations will be based on the industry average of key ratios as computed by the authors using the Prowess database from CMIE found in exhibit 3. This analysis will serve as a guide in
assessing whether the applicant is truly eligible to receive the loan and that such company can make repayments with interest on time.
III. Outline and Assessment of the Internal and External Environment of the Company
Strengths
Three years experience in specializing formal party dresses for girls up to 12 years of age
Provides innovative and modern garments to customers at reasonable prices
Composed of skilled laborers and a qualified textile engineer with 12 years experience in the local garment manufacturing company
Good credibility in the Textile and Garment Industry
Weaknesses
Mainly depends on mortgage loans to satisfy its short-term and long-term requirements
Rapid expansions in subsequent years noticeably increased the short-term and long-term requirements which requires higher mortgage loans entered
Excessive credit periods granted to customers
Insufficient factory space, larger location is essential
Urgency of cash for purchases of raw materials and machineries required for manufacturing
Outdated technology and reluctance to implement new technologies
Opportunities
Promising growth of Textile and Garment Industry in India
Increasing demand in both domestic and foreign markets
Growth of the retail sectors due to increases in the consumerism and disposable income.
Increased opportunity for exports due to favorable trade policies
Increases in per capita income and demographic distribution
Threats
Highly competitive markets and increasing influx of competitors
High transportation costs
Shortage of energy and simultaneously increasing costs of energy
Ambiguous and obsolete labor laws
Lack of economies of scale
IV. Analysis and Comparison of the Financial Position and Results of Operation of the Company
EXHIBIT 4 2012-13
2013-14
2014-15
INDUSTRY
Current Ratio
2.54
1.79
1.6
2.30:1
Quick Ratio
1.31
0.93
0.79
1.20:1
Receivable Turnover Ratio
6 times
2.88 times
3.42 ties
7 times
Day Sales Outstanding
60 days
125 days
105 days
52 days
Inventory Turnover Ratio
-
3.11 times
2.56 times
4.85 times
Inventory Days
-
116 days
141 days
75 days
74%
42%
48%
24%
47.06%
46.89%
64.50%
35%
38%
41%
40%
40%
Net Profit Ratio
18.20%
14%
10.50%
18%
Return on Equity
30.33%
42%
42%
22%
Return on Total Assets
14%
12%
9.00%
10%
Total Asset Turnover Ratio
0.78
0.86
0.87
1.1
Fixed Asset Turnover Ratio
1.05
1.92
1.7
2
30.03
1.55
1.8
3
9.67
7.08
4.53
10
Long-term Debt to Total Debt Ratio Debt to Equity Ratio Gross Profit Ratio
Current Asset Turnover Ratio Times Interest Earned Ratio
Working Capital Turnover Ratio Return on Fixed Assets
-
5.42
2.21
8
19%
27%
18%
24%
LIQUIDITY The liquidity of the company is very low and it decreases from time to time. The current ratio of the company for the year 2012-2013 is 2.54% higher than the average. However, for the year 2013-2014 it drop to 1.79% and it decreases by .19% for the year 2014-2015 showing a 1.6% current ratio. The company is far behind the other company in terms of liquidity, having 1.6% for the year 2-14-2015 compare to 2.3 to one current ratio of an average. The ability to utilize their quick assets to satisfy their short-term obligations is decreasing throughout the period. The company is doing great for the year 2012-2013 with a 1.31% quick ratio .11% higher than the average. Unfortunately, it significantly decreases by .38% for 2013-2014 periods, from 1.31% to .93 quick ratio for the year 2013-2014. For 20142015, the company has a quick ratio of .79%. This data shows that the company has insufficient quick assets to be converted to satisfy their current liabilities.
EFFICIENCY The accounts receivable turnover measures the effectiveness of the company in extending credit and its collection on that credit. For the first period, the company is stable in terms of their AR turnover with the capability to collect its receivables 6 times . However, it decreases after two periods. The ratio drops to 2.88 times, such a significant decrease, and it rises by .54% as the operation continues for the third period, with a AR turnover of 3.42.
Overall, the ratios presented for three periods are not showing good result especially when compared to the average of 7 times despite the increase. Perhaps they should work harder in implementing their collection policy. The company’s days sales outstanding for the receivables for three periods are higher than the industry’s, thus, it really shows that the company has a poor policy implementation in collecting their receivables. As shown below, the company has 60 days for the year 2012-2013 it increases to 125 days for 2013-2014 and it decreases by 20 days for the year 2014-2015 with days sale outstanding of 105 days. Compare to the 52 days of the industry, the company perhaps is not into strict implementation of their credit policy because the data shows poor result towards their collection. Anandam Corporation’s inventory turnover measures how effective the company is in the management of its inventory. The inventory turnover ratios for three periods are lower than the industry average ratio. The drop of inventory turnovers from period to period shows that the company is weak in selling their garments in the market, and it may result to excess inventory. The days supply in inventory measures the days from the moment the inventory was purchased to the day it was sold. The company’s days supply in inventory is way higher than the industry’s average ratio. For the second and third year, the company has 116 days and 141 days, respectively higher than the 75 days of the industry average ratio.
LEVERAGE The company has a higher portion of long term debt to its total debt. With 74% of its
total liabilities are long term debts for the first year. It drops by 32% for the second year, from 74% to 42%. However, it increases to 48% for the third year. The average ratio or percentage is 25% which is way lower than the company’s. The debt to equity ratio shows how the company uses its debt to finance its equity. The debt to equity ratio shows an increasing trend, from 47.06% for the year 1 to 46.89%, immaterial decrease, of year 2 to 64.5% of year 3. It shows that the company is aggressive in financing their assets with debts. Perhaps the company is a risk taker because the higher the debt to equity ratio the riskier it becomes. Total asset turnover is an efficiency ratio that measures the company’s ability to generate sales from its assets. The company’s total asset turnover is at increasing trend, however, it is lower compare to the 1.1 of the industry average ratio. This shows that the company is not using its assets efficiently or there is some problem with asset management. The fixed asset turnover of Anandam Company for year one is 1.05 lower by .95 compare to the average. For year two, it increases to 1.92 closer to the 2 of the average. Unfortunately, it drops to 1.7 for year 3. The company is inconsistent with their efficiency in utilizing their fixed asset in generation profits.
PROFITABILITY The company is stable with their gross profit ratio from 38% of year 1 to 41% of year 2 to year three’s 40% the decrease is insignificant. This shows that the company sells their inventory with a higher gross profit rate, more or less 40% of the cost. It benefits both the company and its shareholders.
Net profit ratio shows the percentage of the this year’s net profit to its net sales. As shown the company’s net profit is decreasing from year one to year three. The company’s net profit for 2012-2013 is 18.3% of its net sales. It decreases drastically to 14% of year 2 and it further decreases to 10.5% net profit ratio of year 3. The company has a problem with their profitability with a decreasing trend to their net profit ratio. Also, compare to the 18% of the industry average, the net profit ratio of Anandam company is way lower. The return on equity of the company shows good result. Return on equity measures the ability of the company to generate profit from the investments of their stockholders. The company’s returns on equity ratios for the three periods are 30%, 40%, and 40%, respectively. These are higher than the 22% of an average industry’s return on equity. This shows that they use their shareholders’ investments effectively to generate profit and it gives a good impression to the investors and to the potential shareholders. Return on total assets is used to measure the ability of the firm to convert the money used to purchase assets into profit. The company has a decreasing ROA for the three periods, from year one’s 0.14 to 0.12 of year two to 0.9 of year three. Compare to 0.10 of an average industry we can say that firm uses the assets effectively to generate profit despite of its descending movement. Working capital turnover ratio measures the efficiency of the company in using their working capital to generate profit. The working capital turnover ratio of Anandam Company is 5% in year one, 3.5 in year two, and 4.77 in year three. These ratios are lower than the average working capital turnover ratio of 8. This indicates the inefficiency of the company in utilizing their working capital to generate profit.
V. Conclusion and Recommendation On the short-term, the goal of the company must be about being liquid. It is not recommended to loan today because of the possible increase in the interest. The times interest of the firm is very alarming because it means almost or third of their operating profit goes to interest. What the company needs to do right now is to restore its liquidity first b efore getting a loan. It means the company must have more cash collection to pay its short term liabilities. The potential of the firm is when they can have more cash, they can have more money on short term to pay their interest. The liquidity position of the company poses an uncertainty on their ability to repay their loan and pay the interest. Provided that they are also inclined to debt financing, it places the company in a risky condition. They also seem inefficient in their collection of receivables and falls behind the industry’s standard. Furthermore, in the view of profitability, the company also failed to meet the industry’s average which gives us a hint of how the company manages it cost in operations. Though the company shows promising growth in the future. There seem to be a problem in their management of operations. As a financial institution, we should not only look at the most basic factors in providing loans to companies, especially loans in large amounts. We must also look at the company’s liquidity, profitability, stability, and also the external factors that may increase the risks further which will not bode well for us. By looking at these factors and cross checking them with the current status of Anandam Manufacturing Company, we can say that currently, disregarding the various forecasts of analysts, Anandam is slowly declining in its operations and faces risk in its inability to collect its own receivables from its customers.
Also, it may potentially face unexpected problems from the re placement of its old equipment is not a good sign for Anandam.
