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The study "Financial Performance Analysis" focuses on the critical financial analysis of a company and aid in decision making. 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…
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Extract of sample "Financial Performance Analysis"
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.
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