The ability of a company to operate efficiently depends on the amount of operating capital. It also depends on the ability of its assets to cover its debts. Anandum Manufacturing Company operates under a very competitive industry in India. Trend analysis helps the company to determine whether it is operating perfectly. This report analyses the financial statement and trends of Anandum Company. It also includes ratio analysis that can be used to decide concerning whether or not to give the company a loan.
Trend Analysis
Income Statement
| 2012-2013 (‘000) | Percentage of the total (%) | 2013-14 (‘000) | Percentage of the total (%) | 2014-15 (‘000) | Percentage of the total (%) | Analysis | |
| Sales | 200 | 10 | 480 | 10 | 800 | 10 | |
| Cash | 1800 | 90 | 4320 | 90 | 7200 | 90 | |
| Total Sales | 2000 | 100 | 4800 | 100 | 8000 | 100 | |
| Cost of Goods Sold | 1240 | 62 | 2832 | 59 | 4800 | 60 | Reduction in cost of goods sold |
| Gross Profit | 760 | 38 | 1968 | 41 | 3200 | 40 | gross profit has increased in the last two years |
| Operating Expenses | |||||||
| General, administration expenses | 80 | 4 | 450 | 9.38 | 1000 | 12.50 | increase |
| Depreciation | 100 | 5 | 400 | 8.33 | 660 | 8.25 | Depreciation has increased by 3percent in the last two years |
| Interest Expense | 60 | 3 | 158 | 3.29 | 340 | 4.25 | Slight increase |
| Profit before taxation (PBT) | 520 | 26 | 960 | 20 | 1200 | 15 | There is a gradual decrease in PBT in both years |
| Tax at 30% | 156 | 7.8 | 288 | 6.0 | 360 | 4.5 | Decrease percentage of tax |
| Profit after taxation | 364 | 18.2 | 672 | 14 | 840 | 10.5 | A gradual reduction in profit after tax in both years |
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Balance Sheet
| Assets | 2012-2013 (‘000) | Percentage to total assets (%) | 2013-2014 (‘000) | Percentage to total assets (%) | 2014-2015 (‘000) | Percentage to total assets (%) | Analysis |
| Inventories | 320 | 13 | 1500 | 27 | 2250 | 25 | |
| Account receivable | 300 | 12 | 1500 | 27 | 2100 | 23 | Increased in the year 2013-14 and then decreased in the subsequent year |
| Cash and cash equivalents | 40 | 2 | 100 | 2 | 106 | 1 | |
| Fixed Assets | 1900 | 74 | 2500 | 44 | 4700 | 51 | Steady decrease |
| Total | 2560 | 100 | 5600 | 100 | 9156 | 100 | |
| Equity and liabilities | |||||||
| Reserves and surplus | 364 | 14 | 1036 | 19 | 1876 | 21 | A steady increase in the two years |
| Long term borrowing | 736 | 29 | 1236 | 22 | 2500 | 28 | A reduction and subsequent increase |
| Equity share capital | 1200 | 47 | 1600 | 29 | 2000 | 22 | Steady decrease for two years |
| Current liabilities | 260 | 10 | 1728 | 31 | 2780 | 31 | Increased in two successive years |
| Total | 2560 | 100 | 5600 | 100 | 9156 | 100 |
Ratio Analysis
| Ratios | Computation | 2012-2013 | 2013-2014 | 2014-2015 | Industry Average | Observations |
| Quick ratio | (Current asset-Inventory)/Current Liabilities | 340/260= 1.31 | 1600/1728= 0.93 | 2206/ 2780=0.79 | 1.20 :1 | Ratios are below the average |
| Receivable turnover ratio | Net Credit Sales/Average Account Receivables | 1800/300= 6 | 4320/900= 4.8 |
7200/1800=4 |
Seven times | The ratio is below the industry average |
| Current ratio | Current assets/Current liabilities | 660/260=2.54 | 3100/1728=1.79 | 4456/2780=1.60 | 2.3 :1 | Ratios meet the average in the industry |
| Receivable days | 365/Receivables Turnover | 365/6= 61 | 365/4.8= 76 |
365/4=91 |
52 days | Above the industry average |
| Inventory turnover ratio | COGS/Average Inventory | 1240/320=3.88 | 2832/910= 3.11 | 4800/1875= 2.56 | 4.85 times | Below the industry average |
| Inventory days | 365/I.T.O. | 365/3.88= 94 | 365/3.11= 117 | 365/2.56= 143 | 75 days | Very high |
| Long term debt to total debt | Long term Debt/Total debt | 736/996= 74% | 1236/2964= 42% | 2500/5280= 47% | 24% | Higher than the industry average |
| Debt to equity ratio | Debt/equity | 736/1200= 61% | 1236/1600= 77% | 2500/2000= 125% | 35% | Much higher than the industry |
| Net profit ratio | Net Profit/Sales | 364/2000=18.2% | 672/4800= 14% | 840/8000= 10.5% | 18% | Below the benchmark |
| Return on equity | Net Profit/Total equity | 364/1564= 23.3% | 672/2636= 25.49% | 840/3876=21.7% | 22% | It varies per year but generally, on average |
| Return on total assets | Net Profit/Total Assets | 364/2560= 14.22% | 672/5600= 12% | 840/9156= 9.2% | 10% | Slightly below the benchmark |
| Total assets turnover ratio | Sales/Total assets | 2000/2560= 0.78 | 4800/5600= 0.86 | 8000/9156= 0.87 | 1.1 | Below the industry average |
| Interest coverage ratio | PBIT/Int. expenses | 580 / 60 =10 | 1118/158= 7 | 1540/340= 5 | 10 | Below the industry average |
| Working capital turnover ratio | Sales/Working capital | 2000/400 = 5 | 4800/1372 = 3 | 8000/1676 = 5 | 8 | Below the industry average |
The company underperformed in most of the financial ratios relative to the industry benchmark. For instance, its interest coverage ratio gradually reduced from three consecutive years to 5 in 2014-15. The performance in this ratio was below the industry benchmark of 10, which means that the company's interest and taxes do not cover all its interest expenses. Besides, quick ratios and short-term liquidity ratios were below the average in the industry. Therefore, the company’s assets that can be easily converted to cash are inadequate to meet its short-term obligations. The firm’s working capital turnover ratio and return on total assets were below the industry average, which indicates that its available assets cannot cover the existing debts.
The lower interest coverage ratio that the company recorded in two previous years raises its chances of becoming bankrupt. The company has less operating profits, which cannot pay for its interests. As a result, the company is more vulnerable to changing interest rates. The company recorded a lower total asset turnover ratio than the industry average, which indicates that it is not efficiently utilizing its assets, exposing it to more internal problems. However, the company has a higher long-term solvency ratio than the industry average. For instance, with an average industry ratio of 35% in debt to equity ratio, the company consistently maintained a ratio above 60% in each financial year. Similarly, the long-term debt to total debt was above 40% each year, above the industry average of 24%. It means that the company has excess debt funding. Nonetheless, based on the discussed financial ratios, I would not recommend granting a loan to Anandam Manufacturing Company as a loan officer. The company’s assets cannot cover for its debt. Therefore, giving them a loan would not be good since there is no collateral.
