Financial Positions of Pumpkin Patch Ltd and Hallenstein Glasson Holdings Ltd - Case Study Example

COMPANY ANALYSIS: PUMPKIN PATCH LTD AND HALLENSTEIN GLASSON HOLDINGS LTD Student name Course name Lecturer’s name Date Executive summary Distress is a financial situation where a company is not in a position to meet its obligations as and when they fall due (Geng, R., Bose, I., & Chen, X, 2015). There are various indicators of distress in a company. One of the indicators of distress is the struggle with liquidity. Liquidity is measured by the ability of the company to have assets that can quickly be realised as cash. A liquid company is in a position to offset current liabilities as and when they fall due. Another measure of distress is using profitability. If a company is not in a position to generate profits, particularly if it is a profit making entity, then it is an indicator of a distress situation. Profit is increased in cases where a company makes more income and spends less. Cash flow is another indicator of a distressed company. If a company has problems with its cash flows, it is in a distress situation. This report aims at establishing the financial positions of two companies Pumpkin Patch Ltd and Hallenstein Glasson Holdings Ltd. It is apparent that from the financial statements and computation of ratios, Pumpkin Patch Ltd is facing financial problems and is distressed. On the other hand, Hallenstein Glasson Holdings Ltd is performing better, evident from financial ratios computed and financial statements Introduction The dynamism evident in the market in the 21st century necessitates that a company becomes competitive and relevant. However, to be competitive and relevant, companies need to catch up with the requirement of customers and both liquid and profitable enough. Pumpkin patch Ltd and Hallenstein Glasson Holdings Ltd are companies that will be analysed in this report, with an aim, of comparing their performances given the fact that the firms are operating in the same industry. Pumpkin Patch is a firm based in Auckland, New Zealand and sells clothing accessories ranging from night ware cloths, rain wear cloths and footwear cloths for all ages. Pumpkin Patch Ltd competes with companies like Hallenstein Glasson Holdings Ltd among others in the clothing industry (CapitalCube, 2016). Pumpkin Patch Ltd has variety of retail stores spread all over New Zealand through which it offers it solutions. Pumpkin patch Ltd has stores spread in the USA, Australia, Asia and Middle East (HARRIS, C. 2015). . Besides, selling through retail stores, Pumpkin patch sells through mail order catalogue as well as the internet. Pumpkin Patch Ltd has segmented its products to meet the requirement of customers of all ages. Products range from those of toddlers, kids, teens to adults (Macroaxis, 2016) Hallenstein Glasson Holdings Ltd is a clothing retailer specialised in women’s (Glassons) wear and men’s (Hallenstein) wear, hence the names Glasson Holdings Ltd. Hallenstein Glasson Holdings Ltd has an established presence in New Zealand and has over 87 stores (HLG.NZX, n.d.). The company is greatly expanding and has established stores in Australia, both Glassons and Storm stores. The company’s success is based on its ability to get current fashionable products and trends out of the stores in a timely manner and quickly (HLG.NZX, n.d.). This report therefore aims at undertaking a critical comparatives analysis of the two companies: Pumpkin Patch Ltd and Hallenstein Glasson Holdings Ltd. Methodology According to Steven, Key, Have, & Walsh (2006), ratios are computations used to assess the performance of firm operating in a particular industry. A firm refers to a single entity whereas an industry refers to a collection of firms. Ratios help financial analysts’ measure performance and undertake comparative analysis of different firms operating in the same industry. In the analysis of the performance of the two companies; Pumpkin Patch and Hallenstein Glasson Holdings Ltd, various ratios have been used. Pumpkin Patch Ltd is undergoing distress whereas Hallenstein Glasson Holdings Ltd is a healthy company. Ratios have been used to show how distress Pumpkin Patch is and how healthy Hallenstein Glasson Holdings Ltd is. A distressed company is a company which is not in a position to meet its financial obligation as and when they fall due. Ideally, a company should be in a position to pay its obligations as and when they fall due. Some of the ratios that have been computed include liquidity and profitability ratios. Liquidity ratios show the liquidity of a company in terms of its ability to meet short term obligations as and when they fall due. The current ratio is a ratio of current assets to current liabilities and shows how many assets a company has for every liability (Leach, 2010). Similarly, the acid test ratio shows the liquidity position after subtracting inventory as an asset. It is a ratio of current assets to current liabilities less inventory. Profitability ratios show the ability of a business entity to make profits. Some of the profitability ratios computed include gross profit margin ratio and net –profit margin ratio. According to Steven D. Usdin and Nella M. Bloom (2012), companies exist to achieve objectives and making profits is one of such objectives. Many a times, profits have been used as a measure of a company’s performance. Profitability ratios therefore help in determining the ability of a business entity to make profits. Findings Pumpkin Patch Ltd From the liquidity, profitability ratios computed, it is evident that pumpkin patch is undergoing a phase of financial turmoil and distress. According to Juselius, M., & Kim, M. (2017), a company should be in a position to meet its obligations as and when they fall due for it to remain relevant and be regarded as a going concern. Ehoff Jr, C., & Gray, D. (2014) notes that when a company is a going concern there is no possibility of the company coming to an end or liquidating any time soon and its existence is deemed to be perpetual. Evident from the financial; statements through the ratios computed, Pumpkin Patch is fighting for its existence. For example, the analysis of the current ratio reveals how the company’s current liabilities cannot be offset by the available current asset except in the year 2014 where the company’s current ratio was 3.03:1, implying that for every current liability, the company has 3 assets to cover it. This is an ideal ratio. In the years 2013, 2012 and 2011, the company’s current ratios were 1.50:1, 0.92:1 and 1.28:1 respectively. The 2013’s ratio of 1.50:1 indicates that for every current liability, the company has a current asset to offset it, which is not an ideal ratio. Similarly, the ratios of 0.92:1 and 1.28:1 for the years 2012 and 2011 respectively indicate that the company has no current asset to offset a single liability and only one asset to offset one liability respectively. It is evident that on average, the company has been operating below the ideal situation in as far as liquidity is concerned. In as far as acid test ratio is concerned Pumpkin Patch has been operating below the ideal ratio of 1:1. In the years 2014, 2013 2012 and 2011, the company’s acid test ratios were 0.63:1, 0.47:1, 0.31:1 and 0.37:1 meaning that the company has no liquid asset available for every liability. This is a very bad liquidity position. The implication means that the company has not liquid asset available for every current liability and is not in a position to meet obligations as and when they fall due. Profitability ratios show the ability of a company to make profits relative to its expenses Leach, R. (2010). There are a lot of profitability ratios that can be computed to establish performance of a company. However, in analysing the performance of Pumpkin Patch Ltd, Gross profit margin ratio and net profit margin ratio were used due to the simplicity of the two ratios and ability to display profitability. Gross profit margin ratio shows the amount of profits generated by a company before deducting its administrative expenses. In the year 2014, 2013 2012 and 2011, the company’s gross profit ratios were 50%, 54%, 54.4% and 60.9% respectively meaning that the company is in a position to cover its expenses from its generated income. The computations show that the company is operating above the ideal percentage of 30% On the other hand, the net profit margin ration shows the ability of a company to make profits after considering its expenses. In the years 2014, 2013, 2012 and 2011, the company’s net profits margins were 5.33%, 2.86%, 4.75% and 6.89%. From analysis, this indicates that the company operates way far below the ideal percentage level of 10%-15%. This is a clear indication that the company is distressed because its expenses are more. In as much as the company generates high gross profits, if expenses are high, profit margin ratio is greatly reduced and is likely to make a company operate at losses. Inorder to be as healthy and financially sound as Hallenstein Glasson Holdings Ltd, Pumpkin Patch Ltd needs to set its liquidity level at an ideal level. One way that will enable the company operate in a healthy way is the management of working capital items. For example, Hallenstein Glasson Holdings Ltd.’s Current and acid test ratios reveal that the company is in a position to meet its current obligations as and when they fall due. This is a clear indication of the company’s ability to manage its working capital items. Similarly, Pumpkin Patch’s current and acid test ratios indicate that the company is not in a position to meet its current and short-term obligations as and when they fall due, an indication that the management of the company’s working capita items like cash in hand, cash at bank and inventory are poorly managed. From the analysis of Pumpkin Patch Ltd, it is evident that due to poor management of working capital, there was high closing stock at the end of each of the four years 2011, 2012, 2013 and 2014 of Ksh 84,375, Ksh 61,448, and Ksh 58,997and Ksh 72,687 respectively. Comparatively, Hallenstein Glasson Holdings Ltd.’s closing stock was well managed at reasonable levels as evidenced by closing stock values of the years 2011, 2012, 2013, and 2014 of Ksh 18,271, Ksh 19,514, Ksh 20,224 and Ksh 19,945 respectively. It is evident from the analysis that Pumpkin Ltd had high levels of current liabilities of Ksh 93,062, Ksh 100,279, Ksh 57,273 and Ksh 30,157 for the years 2011, 2012, 2013, and 2014 respectively as compared to Hallenstein Glasson Holdings Ltd.’s current liabilities amounts of Ksh 21,042, Ksh 22,014, Ksh 18,373 and Ksh 19,402 for the years 2011, 2012, 2013 and 2014 respectively. Hallenstein Glasson Holdings Ltd From the liquidity, profitability ratios computed, it is evident that Hallenstein Glasson Holdings Ltd is a healthy company. Evident from the financial; statements through the ratios computed, Hallenstein Glasson Holdings Ltd is excelling in its performance. For example, the analysis of the current ratio reveals how the company’s current liabilities can be offset by the available current assets. In the years 2014, 2013, 2012 and 2011, the company’s current ratios were 2.22:1, 2.39:1, 2.23:1 and 2.25:1 respectively. This is an indication that Hallenstein Glasson Holdings Ltd is operating within the ideal ration of 2:1. The implication is that for every current liability, Hallenstein Glasson Holdings Ltd has two current assets. On average therefore, it is evident that Hallenstein Glasson Holdings Ltd liquidity position is not wanting and is in a position to meet its obligations as and when they fall due. In as far as acid test ratio is concerned Hallenstein Glasson Holdings Ltd has been operating within the ideal ratio of 1:1. In the years 2014, 2013 2012 and 2011, the company’s acid test ratios were 1.19:1, 1.29:1, 1.34:1 and 1.37:1 meaning that the company has one liquid asset available for every liability. This is an ideal situation. However, in measuring liquidity, acid test ratio should not be considered in isolation alone. This ratio itself in isolation does not give a true picture of a company’s liquidity position. Conclusion Financial distress is one of the problems companies face and always threaten to the going concern assumption of a company. In order to be able to meet financial obligations, companies need to be financially sound in as far as liquidity is concerned. Liquidity necessitates that companies be in a position to repay obligations as and when they due. With respect to the analysis of the two companies, it is logical to conclude that Pumpkin Patch limited is struggling with its daily operations courtesy of evidence supplied by the ratios computed using annual reports. It suffers all indications of a fully distressed company. On the other hand, Hallenstein Glasson Holdings Ltd is financially healthy and stable as indicated by the financial ratios computed. From the analysis, Hallenstein Glasson Holdings Ltd is in a position to meet its obligations as and when they fall due. In conclusion, Pumpkin Patch is actually distressed whereas Hallenstein Glasson Holdings Ltd is healthy. 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