Financial Performance Analysis - Case Study Example

Contents Contents Financial ment Analysis 2 Operating Expense Analysis 2 Possible reasons for the Rising Cost 3 Analysis 4 Balance Sheet Analysis 5 6 Conclusion 6 Financial Statement Analysis The objective of the paper is to analyse the financial statements of a company and aid in decision making.       2008 2009 2010 (Fcst)           Net Sales     99000 106100 111600 Cost of goods sold           Total cost of goods sold     69500 79550 85725 Gross Profit     29500 26550 25875 %     30% 25% 23% The revenues of the company have been on the rise but the problem with the company is in the ever rising costs of goods sold. This can be raw material, packaging and value additive service. Ever since the period of 2008 and till the forecasted there has been drastic decline in the gross profit of the company and this can be attributed to the rising cost of the company. We can see this from the table shown below.   2008 2009 2010 (Fcst) Net Sales 99000 106100 111600 Total cost of goods sold 69500 79550 85725 Cost of goods as % of Sales 70.20% 74.98% 76.81% Cost structure of the company needs to be revamped as the costs are escalating for the company. It has risen from 70% of net sales to 77% of net sales. Operating Expense Analysis Expenses           General & Administrative     3500 5300 5700 Marketing     7500 8500 9000 Operating Expense     9900 10610 11120 Total Expenses     20900 24410 25820 All the major operating expense has risen over the concerned period as a result of which the company is facing huge problems at operating level profitability. This is one of the major concerns for the company. Ebit Margin Analysis         2008 2009 2010 (Fcst) Income Before Taxes 8600 2140 55 EBIT Margin 8.69% 2.02% 0.05% From the above analysis it is clear that at operating level company is having reduced margins every year and if the trend continues it will be dooms day for the company soon. Let us see the trend from the graph which is shown below. Possible reasons for the Rising Cost 1. Extra cost applied by the company at some levels which is not providing adequate profitability as expected 2. Some of the product line have reached product maturity stage and hence are facing reduced margins. Analysis Company has shown increased headcount and this can be one reason why the company is facing such high escalating cost. The risen for the increased headcount can be the expected demand and the failed results.   2008 2009 2010 Fcst   Margin % Margin % Margin % Screws       Television 25% 26% 21% Computers 48% 44% 43% Medical 47% 50% 38% Automotive 21% 18% 12% Screw Total 29% 26% 23% Product profitability analysis suggests that the products margin have reduced in every segment and the maximum hit is taken by Medical and Automotive Segment. One reason that can be attributed to it is the economic downturn. Company needs to discontinue the products which are not profitable and facing huge margins pressure.   2008 2009 2010 Fcst   Margin % Margin % Margin %         Connectors       Television 25% 23% 19% Computers 29% 21% 22% Medical 58% 53% 49% Automotive 25% 26% 18% Connector Total 30% 25% 23% Same is the trend in the connector segment also. The margins have taken a huge hit at operating level. The main reason for this was the decline in medical and automotive segment. Balance Sheet Analysis     2008 2009 2010 Fcst Assets         Cash     250 130 100 Accounts Receivables     5400 6700 8500 Inventory     6700 9200 12000 Total Current Assets     12350 16030 20600             Net Plant & Equipment     1500 1530 1700 Total Assets     13850 17560 22300             Liabilities           Accounts Payables     3000 3100 4500 Notes Payables     400 600 1200 Accured Taxes     300 550 900 Current portion of long-term Debt     200 200 200 Total Current Assets     3900 4450 6800             Long-term Debt     1800 1700 1600 Shareholders’ equity     8150 11410 13900 Total Liabilities and Net Worth     13850 17560 22300 We tried matching up reasons of cost escalation for the company by having a look at asset side of the balance sheet. Company’s cash level has gone down and the accounts receivables are on an ever increasing trend. This is a calamity of the company. Company is not able to create churns in the business. The profit made is stored in books only because cash needs are not meet. Whenever an organisation is not able to meet cash needs it needs streamline in its operations to cater to need. Cost is also increasing for last two years because company is holding onto inventory. As we don’t have idea about the inventory holding cost, we cannot comment on it. But one thing is sure margins are hit at some levels for sure because of this huge inventory pile up for the company. Conclusion This analysis suggests that the company needs to revamp the cost structure at all levels and discontinue some not so profitable products. Company needs to revamp the cost methods and make the necessary changes in the operations of the company. The revenues of the company have been on the rise but the problem with the company is in the ever rising costs of goods sold. This can be raw material, packaging and value additive service. Company has shown increased headcount and this can be one reason why the company is facing such high escalating cost. The risen for the increased headcount can be the expected demand and the failed results. Product profitability analysis suggests that the products margin have reduced in every segment and the maximum hit is taken by Medical and Automotive Segment. One reason that can be attributed to it is the economic downturn. Company needs to discontinue the products which are not profitable and facing huge margins pressure. Company’s cash level has gone down and the accounts receivables are on an ever increasing trend. This is a calamity of the company. Company is not able to create churns in the business. The profit made is stored in books only because cash needs are not meet. Whenever an organisation is not able to meet cash needs it needs streamline in its operations to cater to need. Cost is also increasing for last two years because company is holding onto inventory. As we don’t have idea about the inventory holding cost, we cannot comment on it. But one thing is sure margins are hit at some levels for sure because of this huge inventory pile up for the company. Read More