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• Nam Hong Joo

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Anandam Manufacturing Company: Analysis of Financial Statement

Submitted by:

ALCANTARA, Marielle Edlen ALVIA, Mia Marion DE JESUS, Crisca Joyce ESGUERRA, Noryn Jane SALVADOR, Adelyn Joy VILLANUEVA, Kristelle

I.

ISSUE

Anandam Manufacturing has approached a local bank for loan for additional funding of P50, 000,000.00 to meet the requirements of the garment manufacturing company. The additional money from the loan is required to carry out smooth operations and to expand the business. The main issue identified is whether to sanction the loan to Anandam Manufacturing by looking at their financial statements.

II.

OBJECTIVES

We are aiming to conduct a thorough financial analysis of the company to make sure it has the capabilities to borrow and pay the said loans. Also, to go over their financial statements with the assistance of prior knowledge about financial analysis to be supplied with adequate information on how the company is operating by calculating its financial statement ratios through horizontal or trend analysis. This will be the grounds on proving whether the company is worthy of sanctioning the loan or not.

III.

RELEVANT FACTS 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 times

7 times

Receivable Days

60 days

125 days

105 days

52 days

Inventory Turnover Ratio

̵

3.11

2.56

4.85 times

Inventory Days

-

116 days

141 days

75 days

0.74

0.42

0.48

24%

47.06%

46.89%

64.50%

35%

Gross profit ratio

0.38

0.41

0.4

40%

Net profit ratio

0.182

0.14

0.105

18%

30.33%

42

42

22%

Return on total assets

0.14

0.12

0.09

10%

Total asset turnover ratio

0.78

0.86

0.87

1.1

Fixed asset turnover ratio

1.05

1.92

1.7

2

Current asset turnover ratio

30.03

1.55

1.8

3

Times interest earned ratio

9.67

7.08

4.53

10

-

5.42

2.21

8

0.19

0.27

0.18

24%

Long-term debt to total debt Debt-to-equity ratio

Return on Equity

Working capital turnover ratio Return on fixed assets

By computing the ratios from years 2012 to 2015, we can compare the average ratios of the Industry and of the company, and we can determine what are the problems in the company.

IV.

ANALYSIS OF THE CASE

The liquidity ratio of the company shows an unfavorable implication. Since in their current ratio, the first year which is 2012-2013 were favorable because 2.54% shows high liquidity as compared to the average ratio of the over-all industry however as the time pass by, in the year 2014-2015, the liquidity decreases showing only 1.6% that makes them low liquidity as compared to the other industry. Then, their quick ratio, from 1.31% in 2012-2013, it dropped to 0.79 in 20142015. Their liquidity ratio shows that they cannot satisfy their obligations on time. The efficiency of the industry is unsatisfying; they need to implement appropriate policies for their company. Their receivable turnover, days sales outstanding, days’ supply in inventory, and inventory turnover, shows that they are not as effective as the owner thought, because of the large drop in collecting receivables, extending credit and the days to sold their products is higher than the 75 days so there is also excess inventory to customers. We can see that the debt-to-equity ratio is increasing this signifies that the higher their debt incurred the riskier it is. Also the times interest earned ratio is decreasing; it means that if the times interest ratio is lower, the company may not be in the position to meet its obligation. We can also compare the asset turnover of the Company, although it is increasing, it only increases in a very small amount compared to the Industry. 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.

V.

Recommendations

Strengths  Good-quality fabrics  Sophisticated designs of children’s dresses  Skilled labor  12 years experience in a textile manufacturing company Weaknesses  He doesn’t have a structure system to track of the extensions of credit periods in collecting money from customers  Orders were either not dispatched or delayed delivery  Using borrowed funds for short and long-terms without planning strategically, since he withdraw funds whenever he felt he needed to. Opportunities  Increased in per capita income and demographic distribution  The youth preferred branded products

 

More opportunities for exports Increasing cloth production due to increasing demand

Threats  Many national and international players were entering the textile market in India

We recommend that Anandam Manufacturing Company should implement faster conversion cycle of A/R because if they will convert the cycle faster than usual, it will keep the current ratio in control in a sense that it can improve the collections from the debtors. We would also like to point out the significance of quicker conversion of inventory into accounts receivable or cash, with that the quick assets would increase which will later on results to a quick ratio. The company should also take a look at collection period were in they need to improve that area in order to have direct impact on the quick ratio. Lower collection period signifies faster rolling cash. In addition, the company may implement timely billing so that the customer can get the cash immediately and to prevent any delay in collection. The company could also implement a well-established borrowing money plan in order for the company to be aware on the borrowing just enough to satisfy their liabilities. This will help to keep the company on track and updated and to keep the equity and debt ratio stable. We highly recommend improving their efficiency and analyzing how to improve productivity of the assets they have. Thus, the company's output should increase without significant increase in the expenses since our main goal here is to be economical. Lastly, we recommend that the company should consider their product line up to determine what the customers are in that most profitable group. Of course, it is important to set this in order to identify which will be focus on or which are not necessary that may later on just add up cost. With the proper selection of products, the company could have a view point what to do to the prices, they could adjust the prices upward to increase the gross profit margin or they could lower some prices to increase the sales volume and net profits. This process could actually improve their net profit ratio.