Test 2
Test 2
Test 2
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Question 1: Prepare the cashflow.(Table of cashflow)
A positive increase in cash is shown from the operating activities and most of the cash
comes from the income statement activities. The interest expense was also moved to finance
section and the addition of the depreciation as non-cash charge helped to boost the cash flow.
The inventory has increased, thus decreasing the operating cash flow and this shows that
Anandam has adopted a more conservative working capital strategy for increasing the level of
the inventory on the balance sheet. The cash flow from investing activities shows that in the
last few years less cash has been invested for buying new PPE and this has a positive impact
on cash. However, this had increased in 2014.
Finally, the net cash flow from financing activities shows a positive trend, especially in
the last one year. The equity issue and the debt issue for the company has increased and this is
from where the financing has been generated by the company. The share issue has increased
the cash balance by $ 400 in each of the two years The case does not provide any evidence of
dividends. If we sum up all the above analysis, then we can conclude that the cash position of
the company is quite strong at present and it has enough cash to cover its obligations.
Question 2: Common size statement of the company
Common-size statement is an output of common-size analysis. It is a tool to evaluate
individual financial statement items or group of items of a specific base amount which is the
Revenue or Total sale for Income statement or the Total assets for the statement of financial
position.
In this case of Anandam manufacturing company, the common-size analysis shows that
majority of the sales, around 90% are derived through credit sales for the company. The cost
of sales as a percentage of sales declined for the company however, all the operating expenses
such as interest expense, selling, general and admin expense have all increased for the firm.
The operating and net profit percentage of the total sales is also following a negative trend
which is quite alarming for the management of the company. This is not a positive sign about
the profitability of the company.
The vertical balance sheet shows that cash as a percentage of the total assets has
decreased and similar is the situation with accounts receivables. However, the latter is a
positive trend for the company. The inventories are also decreasing as a percentage of total
assets and this suggests that the conservative working capital policy is working in the favor of
the company. On the other hand, the long term debt has increased as a percentage of total
assets for the company and the current liabilities have slightly decreased. The common-size
statements are shown below:
For the first year of activity the company registered a profit of ₹364 000 with a gross
profit of ₹760000. The following year, the profit after tax has almost been multiplied by 2.
And in 2014-2015, we noticed a slow down in the growth because it is an increase of 25%
compared to the past year.
But it is still a lot higher than the growth in the sector these past 3 years which was
around 14% growth per year. So the profit of Anandam is growing at a higher rate than the
market. Furthermore, we notice that the gross profit in 2014-2015 increased from 38,5%
while the profit after sale registered only 20% of growth. So, we need to be careful about the
increase of the fixed costs. Indeed, this difference shows that the fixed expenses are growing
faster than the sales.
Assets
Current assets
The value of the company has increased over these past 3 years. It has almost been
multiplied by 4. When we look further, at the long term equilibrium for example, the firm has
a ₹400,000 margin to cover current activities. (1200+364+736-1900). The second year, this
long term equilibrium increased to ₹1,372,000 which is a very large margin to cover the short
term activities. We see that this margin is much more appreciated because the difference
between account receivable, inventories and current liabilities in 2013-14 (3000-1728) is
₹1,272,000. The short term activities needs are covered by the long term margin. It means
that the company is in good health in 2013-14. In 2014-2015, the long term equilibrium is
₹1,676,000 and the short term needs are ₹1,570,000. Again, the long term ressources can
cover the short term needs.
We can conclude that the company can answer to the short term needs thanks to its
resources so it is a solid company. The reserve and surplus are growing year after year and
the cash available stays stable around ₹100,000. It is not too high, so it shows that the value
added by the company to the production is reinvested to make more profits. The firm also
used each year the increase in share capital to finance itself. The investors have confidence in
Anandam and invest more in the project.
Question 3:
In this case of the Anandam manufacturing company, the horizontal financial
statements in the long-term, which 2012-2013 is the base year gives a quite bright side of the
Anandam statement . The horizontal financial statements are shown in the tables below:
Amount
Amount Amount
% ('000) % %
('000) ('000)
Operating costs
Anandam’s income statement trend analysis indicates a reduced 2013-14 net earnings
(85%) compared to the base year and 2014-15 (100% and 131%), respectively. This trend is
attributed to increased operating expenses such as energy and transportation costs. As per the
above table, it is evident that administration, selling and general expenses rose to 463% in
2013-2014. These costs cover energy and transportation expenses. However, the 131%
increase in profits in 2014-2015 means that the management could control their resources
effectively. Increased revenues (to 300%) in the 2014-2015 year was attributed by increased
demand is also another factor that could have triggered a 131% increment in the company net
earnings in 2015.
Current Assets
Total Equity&
Liabilities 2560 100% 5600 119% 9156 258%
Anandam’s net fixed assets showed a decreasing trend in 2013-2014 (32%) compared
to the base year 2012-2013 (100%) but then it increased to 147% in 2014-2015. A similar
trend was also witnessed in total equity, albeit the decrement in 2013-2014 went down to
69%. The total assets indicated an escalating trend from 2013-2015 (from 100% to 119% to
258%). Similarly, and to the most remarkable increased movement are Anandam’s total
liabilities. They drastically escalated from 198% to 430% in 2014 and 2015 from the base
year of 100% in 2012. The same trend was also witnessed in the company’s total equity
combined with total liabilities by the same measures. The highly increasing trend in
Anandam’s liabilities is attributed to the management’s taking of Mortgage loans in funding
the business from the tune of ₹1,236,000 to ₹2,500,000 between 2014 and 2015 for
expansion purposes of the manufacturing activities.
However, on the other hand, if the determination of the base year is changed to the year
immediately preceding it for consideration in a short operating cycle, the result may be
opposite. It's growth of Anandam is there but the rate is less than the previous year.
The statements above have also been generated and the income statement shows that the
sales growth has declined from 140% to 66.67% which is quite alarming for the management
of the company. The operating profit and the net profit for the company have both declined
from 84.62% to 25%. This shows that the profitability of the company is declining
significantly and the decline in the sales is a major factor contributing to this.
The declining profitability is also due to the decrease in the gross profit of the company.
The cash balance for the company is showing a negative growth and it has reduced from
150% to 6% in 2014. The long term debt on the other hand, had increased from 67.93% to
102.27% and this is a serious risk for the company because taking large debt might reduce the
credit rating of the firm and the decision for the loan approval might be rejected. Finally, the
total assets have declined from 118.75% to 63.50%.
QUESTION 4: What are the various ratios computed to analyze financial statements?
Ratio analysis focuses on one or more elements of a company’s financial condition or
performance. Ratios are among the widely used tools of financial analysis because they
provide clues for underlying conditions
The ratios are organized into the four types of financial statement analysis:
profitability, liquidity and efficiency; solvency; market prospects.
The profitability ratios measure a company’s ability to provide financial rewards
sufficient to attract and retain financing. The liquidity ratios measure the company’s ability to
meet its short-term obligations. And the solvency ratios measure the company’s ability to
meet its long-term obligations. And market prospects mean the ability to generate positive
market expectations. Overall, all the ratios under such categories represent a company’s
overall performance level as well as its risk level
Inventory turnover ratio 4.85 times 3.875 times 1.888 times 2.13 times
Interest coverage ratio 10 times 9.67 times 7.08 times 4.53 times
Working capital turnover ratio 8 times 5 times 3.5 times 4.77 times
Return on fixed assets 0.24 0.192 0.2688 0.179
Based on the calculated ratios for Anandam’s Manufacturing Company, this subsection
evaluates ratios categorized into liquidity solvency, operating performance, and asset-use
approaches. These metrics help assess the company’s financial capacity compared to the
industry averages.
Anandam’s liquidity ratio is lower than that of the industry average in 2014 and 2015,
respectively. The company’s current ratio of 1.793:1 and 1.603:1 metrics in 2014 and 2015
are lower than the 2.3:1 industry average. It is only in 2013 that the ratio (2.538) was higher
than the industry average. A similar trend was witnessed in its quick ratio. The percentage
decreased to below the 1.20:1 industry average (0.926:1-0.794:1) in 2014 and 2015).
Regarding Anandam’s solvency and capital structure ratios, it is evident that they show
an increasing trend in the years under analysis. The trend was unfavorable as it shows that the
entity used to finance its business assets with more debt than equity. The company registered
63.7%, 112% and 136% D/E ratios in 2013, 2014 and 2015, respectively. The ratio was far
more than the 35% industry average. The same case happens with long-term debt-to-total
debt; it is higher than the industry average. The interest-coverage metric decreases in the
years under analysis from 9.67, 7.08 and 4.53 times from 2013-2015. This means that the
ability of the company to meet short-term debts is constricting as years go by.
Regarding investment ratios, Anandam’s ROTA and ROE ratio indicate a decreasing
trend from 2013-2015 at a rate below the sector’s averages of 10% and 22%, respectively, for
both ratios. These ratios imply that Anandam’s investment gains have been decreasing over
the years, and the trend have been increasing the company’s risks as debt is rising without a
consequent increase in gains.
Anandam’s gross profit margin indicated an increasing trend of 38%, 41% and 40%
from 2013 to 2015. The increment was fair as it coincided with the industry average at 40%
in 2015. Unluckily, the Net Profit margin showed a downward trend of 18.2%, 14% and
10.5% in the three years of analysis. This was attributed to the increased operational costs of
the company.
Lastly, on efficiency ratios, the company’s total asset turnover is fair as it increased
from 0.78-0.874 between 2013 and 2015, albeit it slightly lagged below the sector average by
0.03. Anandam’s working-turnover ratios were 5, 3.5 and 4.77 in 2013,2014 and 2015,
respectively. The metrics are below the industry average, indicating that the company was not
adequately efficient in utilizing its net assets to generate revenues.
Question 6: Based on these ratios and their comparison with industry ratios, would
you, as a loan officer, grant the loan request?
As a loan officer, I cannot grant the loan. As per given data, the ratio of the company fell
down in financial 2015. Key ratio of the company is also below the industry average ratio, for
example current ratio of the company is 1.60 while the average sector is 2.3. Most
importantly, the debt-to-equity ratio of the entity is extremely high, 1.36 compared to the
average ratio of the sector which is only 0.35. It is too risky to approve a loan for a company
that has too much debt which means they may not pay the debt.
Question 7: What areas of improvement can you suggest for the future?