Anandam Manufacturing Company – Analysis of Financial Statement
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Anandam Manufacturing Company:Analysis of Financial StatementSubmitted by:Bito-on, Jessa Marie O.Jalon, Erna KayePuy, LauderdaleSadioa, Leonette Ann G.Sampang, Hazlin ZuzannaFinance 211-ASubmitted to:Mr. John Carlos P. WeeI. Case SummaryBusinesses, once expanded, is invulnerable of arising financial problems that eventually heightens in the going concern of the company. Agarwal, the owner of the Anandam Manufacturing Company, a garment business, approached his loan officer and confidently raised and discussed his company’s financial needs. He submitted a detailed proposal and a project report to the bank, alongside with their financial statements of previous years to be further analyzed and processed for loan sanctioning. He seeks to be funded for the amount of 50 million in sustenance for his developing company since he also believed that their performance was excellent in a highly competitive market. The money is required to carry out smooth operations and expand the business. He is in dire need of the loan to meet with his company’s cash and investment requirements. II. Objective of the AnalysisTo conduct a financial analysis of the company with the assistance of prior knowledge about financial statement analysis and go over their financial statements: income statement and the statement of financial position/balance sheet to be supplied with adequate information regarding the financial health of the firm with the aid of calculating financial statement ratios through horizontal or trend analysis. Through this analysis, this will serve as the gateway in finding out whether the said company is worthy of sanctioning the loan or the other side of the coin.III. Outline and Assessment of the Internal and External Environment of the CompanyStrengthsModern stylish dresses for children.Skilled laborExpertise in Garments for children below 12 years.WeaknessesAnand Agarwal kept using both short-term and long-term borrowings for business expansion. So he was not aware of the risks involved in simultaneous use of short-term and long term borrowings.OpportunitiesGrowth of Textile Industry in IndiaIncrease in per capita income and consumerism.Exports to USA/ High demand in USAIncrease in labor cost in ChinaFavorable trade policies.ThreatsMore and more entrepreneurs would potentially enter to other sectors Large players in the market could probably receive huge boost in the form of FDI. IV. Analysis and Comparison of the Financial Position and Results of Operation of the CompanyLiquidity Current RatioThe current ratio of Anandam Manufacturing Company shows a decreasing trend. In the year 2012-2013, the liquidity of the company is at 2.54%, a little bit higher compared to the average ratio of the over-all industry. However, in the succeeding years, it drop to 1.79 (2013-2014) and eventually at 1.6% in the year 2014-2015. Anandam Company is not as liquid as the other corporations of the same industry, thus these ratios show unfavorable results to the company.
Quick RatioThe quick ratio for Anandam Corporation shows a decreasing trend. In the year 2012-2013, the companys ability to service short-term obligations is at 1.31%, at least 11% higher compared to the average ratio of the industry. However, in the next succeeding years, the ratio dropped by 38% (2013-2014) which resulted to 0.98 and eventually 0.79 in the year 2014-2015. This is an unfavorable implication to Anandam Corporation; the corporation’s ability to meet its short term obligations is not satisfactory. This also implies that Anandam company cannot immediately convert its current liabilities to finance short term debts. EfficiencyThe Accounts Receivable Turnover ratio for Anandam Corporation is used to quantify the company’s effectiveness in extending credit and in collecting debts on that credit.  The company’s ratio compared to the industry is lower. In 2012-2013, it shows that the company can still manage to collect its receivables for 6 times, however, this number gets lower and lower as years pass. In 2013, the ratio drop to 2.88 times and increases at 3.42 times in the year 2014-2015.  In the first years of operations, the company still needs to improve its policy on the collection of receivables. Unfortunately, in the year 2013, there was a huge drop which may be due to the company’s inefficiency in collecting and extending credits to the customer. Over all, the ratio reported is not a good sign for the company. Their performance in terms of extending credit is not good and should be improved. The Days Sales Outstanding for the receivables of Anandam Corporation shows a large difference compared to the industry. This is unfavorable for the company because it takes so long for them to collect the receivables. In the next two years, the gap is even getting larger. This may be attributed to the poor policy implementation of the company.Anandam Corporation’s inventory turnover, measures how effective the company is in the management of its inventory. The ratios formulated from the company’s financial statements are still lower when compared to the industries average ratio. For year 2013-2015, a drop of the values is reflected. This is unfavorable for the operation of the company. It may imply weak sales for Anandam’s garments and, therefore, an excess inventory.The Days Supply in Inventory ratio for Anandam Corporation measures the number of days before the inventories are sold or distributed. The ratios for the company’s two-year operating period show a really large difference between the average ratio of the industry.  From 116 days in year 2 up to 141 days in year 3. The number of days for the company to sold the inventories is much more higher compare to the 75 days in the industry. This result is not favorable to the company’s operation.LeverageThe Debt to Equity Ratio of the company indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. The debt to equity ratio Anandam Company shows an increasing trend, from 0.64 in the first year which increased to 1.12 and eventually rises to 1.36. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. The higher the debt incurred by the company, the riskier it becomes.The Times Interest Earned ratio measures the firm’s ability to make contractual payments. The ratio of the company for three consecutive years is lower compared to the average ratio of the industry. This imply an unfavorable result to the company, and the fact that there is a decresing pattern makes it more unsatisfactory. Lower values  of TIE ratio highlight that the company may not be in a position to meet its debt obligations.The total asset turnover  ratio is an efficiency ratio that measures a companys ability to generate sales from its assets by comparing net sales with average total assets.When compared to the industry’s ratio of 1.1, the company’s ratio for its three-year operation is lower although in an increasing trend. This implies that the company isnt using its assets efficiently and most likely have management or production problems.The company’s fixed asset turn over ratio is lower when compared to the industry’s average ratio. From 1.05 in 2012, 1.92 in 2013 and 1.7 in 2014, although the increase-decrease trend is manisfested this may still be considerable because the operation of the firm may differ from one period to another,still low ratio means inefficient or under-utilization of fixed assets.Thus, this is an unfavorable implication for the company.ProfitabilityThe Gross Profit Ratio of the the company shows a stable flow. Although there is a slight decrease on the third year, the decrease is still manageable. Compared to the over all average ratio of 40%, the company’s profitability is favorable to the part of both the company and its shareholders. Higher ratios mean the company is selling their inventory at a higher profit percentage.Net profit (NP) ratio is a useful tool to measure the overall profitability of the business. Anandam Company’s Net Profit Ratio shows a decreasing trend. During 2012, there is 0.182 ratio, 0.14 in the second year until it reached to approximately 0.11 in the third year. When compared to the industry’s ratio of 0.18, this is not favorable to the profitability of the company.Anandam’s Return on Equity ratio shows a positive sign to the company. The average ratio of the industry is at 22%, and the company generated a 30%, 40%, 40%, respectively for its three-year operation. Since ROE measures the ability of a firm to generate profits from its shareholders investments in the company. This implies that the company is using its investors funds effectively and is favorable on the part of its investors. The ratio on the return of total asset of Anandam Company shows a decreasing  flow, from 0.14 in 2012, 0.12 in 2013 and 0.09 in 2014. When compared to the over all ratio of the industry, this value is approxiamtely close to the .10 ratio. Since ROA shows how efficiently a company can convert the money used to purchase assets into net income or profits, this implies a favorable result on the part of the investors and the company as well. A positive ROA ratio usually indicates an upward profit trend as well. The Working Capital Turnover Ratio of Anandam Company is at 5% in 2012, 3.50 in 2013 and 4.77 in 2014. These ratios are still lower when compared to the industry’s over-all ratio. It shows company’s efficiency in generating sales revenue using total working capital available in the business during a particular period of time.A low ratio indicates inefficient utilization of working capital during the period and thus, unfavorable to the company.  2012-132013-142014-15INDUSTRYCurrent Ratio2.541.791.62.30:1Quick Ratio1.310.930.791.20:1Receivable Turnover Ratio6 times2.88 times3.42 times7 timesRecievable Days60 days125 days105 days52 daysInventory Turnover Ratio̵̵3.112.564.85 timesInventory Days-116 days141 days75 daysLong-term debt to total debt0.740.420.4824%Debt-to-equity ratio47.06%46.89%64.50%35%Gross profit ratio0.380.410.440%Net profit ratio0.1820.140.10518%Return on Equity30.33%424222%Return on total assets0.140.120.0910%Total asset turnover ratio0.780.860.871.1Fixed asset turnover ratio1.051.921.72Current asset turnover ratio30.031.551.83Times interest earned ratio9.677.084.5310Working capital turnover ratio-5.422.218Return on fixed assets0.190.270.1824%