Accounting and Financial Management for

Managers (Team 3)

CASE STUDY #1:

ANANDAM MANUFACTURING COMPANY:

ANALYSIS OF FINANCIAL STATEMENTS

Submitted to: Submitted by:

Laurie Sveinson Kapil Goyal (100447443)
Navpreet (100450810)
Navdeep Kaur (100450815)
Abhimanue (100452188)
Manmehak (100451912)
Table of Contents

Cash Flow Statement Analysis (Appendix 1) .................................................................... 3

Common Size Statement Analysis (Appendix 2) ............................................................... 3

Trend Analysis (Appendix 3) ............................................................................................... 4

Ratio Analysis (Appendix 4) ................................................................................................ 4

Loan Decision ....................................................................................................................... 5

Recommendations ................................................................................................................ 5

Appendix 1 - Cash Flow Statement (In ₹ Thousands) ...................................................... 6

Appendix 2 Common Size Statements ............................................................................... 7

Common Size Income Statement..................................................................................... 7

Common Size Balance Sheet ............................................................................................ 7
Appendix 3 - Trend Analysis ............................................................................................... 8

Income Statement Trend Analysis ................................................................................... 8

Balance Sheet Trend Analysis .......................................................................................... 9
Appendix 4 - Ratio Analysis .............................................................................................. 10

Reference ............................................................................................................................ 10
Cash Flow Statement Analysis (Appendix 1)

Operating Activities: It displays the cash flow that focuses on core business of the company.
Net cash provided by the company in initial years was in hundreds. But it grew tremendously
in 2014 to 1202. This growth in net cash reflects enhanced profitability and working capital.
Investing Activities: Cash flow provided by investing activities includes investments that
help the company grow. In this section, red numbers depicts that the company is making a lot
of investments to grow. Anandam is a typical example aggressive investments in fixed assets,
increasing from ₹2000 thousand in 2012-13 to ₹2,860 thousand in 2014-15. This indicates
Anandam's commitment to expanding its infrastructure, anticipating growth.
Financing Activities: Cash flow from financing activities includes all the activities related to
net flow of funds used to run the company including debt, equity, and dividends. Initially, the
company has a net cash inflow of 1936 (in ₹ thousands), mainly by issuing shares. In next
year, the inflow decreased to 900, but in 2015, it recovered with a net cash inflow of 1664,
largely due to long-term borrowing.
Despite improved operational cash flows, the net cash position saw a modest rise from ₹40
thousand in 2012-13 to ₹106 thousand in 2014-15. This underscores the company's
significant investments and rising borrowings.

Common Size Statement Analysis (Appendix 2)

Common size income statements depict the financial performance and position of the
company. From Common Size Income Statement, we can see that 90% of the sales were on
account and all the operating expenses, i.e., General, administration, and selling expenses,
depreciation, and interest expense are increasing. Moreover, net income has also declined
from 18% (2012) to 11% in 2014, due to poor management of operating expenses.
And, from the common size balance, we can analyze that company’s account receivables and
inventory has shown an enormous increase. In 2014, Account receivables has become 7 times
of the amount that was in 2012, from 300 to 2100. Furthermore, inventory has also increased
from 12.5% to 24.6%. This means company is unable to encash the account receivables on
time and is facing problems in selling the goods.

Moreover, Anandam’s investments in fixed assets have also reduced from 74.2% to 51.3%. It
can be said that company might be selling their fixed assets to pay the loans.
Apart from this, we can see that company’s equity share capital has fallen to 21.8%, it means
that Anandam’s shareholders might not be feeling secure. So, they pulled their money out of
the business. On the other hand, reserves and surplus have increased 14.1% to 20.5%, So, it
can be said that company is making profits. While, long term borrowings have shown a slight
change, current liabilities have become threefold.
Trend Analysis (Appendix 3)

The firm had significant growth in its fixed assets, cash and cash equivalents, accounts
payable, and inventory from 2013 to 2015. The 132% growth in fixed assets indicates a
significant capital expenditure budget. Over the course of three years, the company's
administrative expenditures climbed by 1250%, which may be the result of rapid expansion
or heightened marketing activities.
There is now 250% more cash and cash equivalents available, indicating a higher level of
short-term liquidity. The 500% and 700% increases in accounts receivable may indicate
longer credit terms. With a 469% and 703% increase in inventory, company is unable to sell
the goods. Equity share capital increased by 133% and 167% between 2013 and 2015,
respectively, indicating increased shareholder investment in the company.
The reserve and surplus increased by 285% and 515% between 2013 and 2015, respectively.
This growth may have been caused by retained earnings. The fact that long-term borrowings
increased by 340% indicates that the company needs long-term debt in order to function.
Current liabilities increased 665% between 2013 and 2015 and nearly doubled (1069%) in
2015, indicating delay in payments.
Hence, company is not able encash the account receivables and also facing problems in
selling the products.

Ratio Analysis (Appendix 4)

The financial ratios of Anandam Manufacturing Company provide information about its
financial strength and stability when compared to industry benchmarks. Important
conclusions consist of:
Let's start by thinking about the current ratio. Although Anandam's ratio dropped from prior
years, they still have enough assets to pay off their existing obligations, as seen by their
1.60:1 ratio in 2014–2015 compared to the typical sector's 2.30:1. At 0.79:1, Anandam's
quick ratio is lower than the average. Therefore, the business may have trouble meeting its
short-term debt. This may cause suppliers and creditors to get concerned.
Anandam was only able to collect payments four times a year, compared to the sector's usual
seven times. This indicates that Anandam requires more time than the industry to collect
payments.
With an inventory turnover ratio of 2.56 as opposed to the industry average of 4.85 times,
Anandam has a substantially shorter turnover period—143 days as opposed to 75 days for the
industry.
In addition, the company's debt-to-equity and long-term debt-to-total-debt ratios are almost
twice as high as the industry average. This suggests that Anandam has racked up a lot more
debt compared to other businesses, which can prove to be an issue later on.
Moreover, Anandam's net profit margin and return on equity are somewhat lower, even if
their gross profit margin is in line with the industry. This shows that there is poor
management of the operating expenses which reduced the net income.
The interest coverage ratio decreased as well, going from 10 in the 2013–2014 period to 6 in
the 2014–2015 year, indicating possible difficulties dealing with interest costs.
In conclusion, the company should manage its account receivables, inventory and improve
income, to grow its industry position and ensure long-term financial health.

Loan Decision

After analysing the Anandam Manufacturing financial statements, as a loan officer, I am not
going to approve the loan. The following are the reasons supporting our decision:

1. The quick and current ratios of Anandam's liquidity are both lower than the industry
averages. This suggests that fulfilling short-term obligations may be difficult, which
raises questions about the company's capacity to take on more debt.
2. The business collects payments and sells its products more slowly than its
competitors. These inefficiencies may put a pressure on cash flows and may have an
impact on loan payback terms.
3. Company’s interest coverage ratio is also below the requirements. If company is
facing difficulties in paying the interest expense. So, how will it repay the debt.
4. Anandam has already 3 loans running and he is also left with no collateral security.
So, taking one more loan would be risky because future is uncertain.
5. And, company is also facing problems in converting the inventory to sales as
compared to his competitors.
6. Lastly, its account receivables are increasing at an increasing rate each year. Thus,
company has less flexibility to collect cash to run operation effectively.

Recommendations

Upon careful examination of Anandam Manufacturing Company's financial statements, a

number of areas needs prominent changes:
1. Managing account receivables: The company should focus on reducing its account
receivables by shortening the credit time and regular collection of payments.
2. Inventory management: The company can adopt marketing strategies to sell the good
fast.
 3. Lowering the operating expenses: The company's primary goal should be to reduce
operational expenditures since this would boost profitability.
4. Utilization of short-term debt: In the upcoming years, the company should try to
maintain a balance between short term debt and long-term debt to meet its financial
commitments.
5. Short-term debt utilization: To satisfy its financial obligations, the firm should
endeavor to maintain a balance between short-term and long-term debt in the coming
years.

Appendix 1 - Cash Flow Statement (In ₹ Thousands)

Particulars 2012-13 2013-14 2014-15

Cash Flow from Operating Activities
Net Income 364 672 840
Adjustments:
Depreciation 100 400 660
Increase in Current Liabilities 260 1468 1052
Increase in Inventory (320) (1180) (750)
Increase in Account Receivables (300) (1200) (600)
Net cash provided by Operating Activities 104 160 1202

Cash Flow from Investing Activities

Purchase of Fixed Assets (2000) (1000) (2860)
Net cash used in Investing activities (2000) (1000) (2860)

Cash Flow from Financing Activities

Issue of Shares 1200 400 400
Increase in long term borrowings 736 500 1264
Net cash provided by Financing Activities 1936 900 1664

Net change in cash 40 60 6

Cash and Cash equivalents in the beginning 40 100
Cash and Cash equivalents at the end 40 100 106
Appendix 2 Common Size Statements

Common Size Income Statement

Particulars 2012-13 2013-14 2014-15

Net Sales 100% 100% 100%
Cost of goods sold (62%) (59%) (60%)
Gross profit 38% 41% 40%
Operating expenses
General, administration, and selling expenses (4%) (9%) (13%)
Depreciation (5%) (8%) (8%)
Interest expense (3%) (3%) (4%)
Profit before tax 26% 20% 15%
Tax (8%) (6%) (5%)
Profit after tax 18% 14% 11%

Common Size Balance Sheet

Particulars 2012-13 2013-14 2014-15

Assets
Current Assets
Cash and Cash Equivalents 1.6% 1.8% 1.2%
Accounts receivables 11.7% 26.8% 22.9%
Inventories 12.5% 26.8% 24.6%
Fixed Assets 74.2% 44.6% 51.3%
Total Assets 100% 100% 100%

Shareholder’s Equity and Liabilities

Shareholder’s Equity
Equity share capital 46.9% 28.6% 21.8%
Reserve and surplus 14.1% 18.4% 20.5%
Total shareholder’s equity 61 % 47% 42.3%
Liabilities
Current Liabilities 10.2% 30.9% 30.4%
Long term borrowings 28.8% 22.1% 27.3%
Total Liabilities 39% 53% 57.7%
Toral Shareholder’s Equity and Liabilities 100% 100% 100%
Appendix 3 - Trend Analysis

Income Statement Trend Analysis

Particulars 2012–13 (Base 2013– 2014–

Year) 14 15
Total Sales 100% 240% 400%
Cost of goods sold 100% 228% 387%
Gross profit 100% 259% 421%
General, administration, and selling 100% 562.5% 1250%
expenses
Depreciation 100% 400% 660%
Interest expenses (on borrowings) 100% 263% 567%
Profit before tax (PBT) 100% 185% 231%
Tax @ 30% 100% 185% 231%
Profit after tax (PAT) 100% 185% 231%

Particulars 2012-13 2013-14 2014-15

Net Sales 2000 4800 8000
Cost of goods sold (1240) (2832) (4800)
Gross profit 760 1968 3200
Operating expenses
General, administration, and selling expenses (80) (450) (1000)
Depreciation (100) (400) (660)
Interest expense (60) (158) (340)
Profit before tax 520 960 1200
Tax (156) (288) (360)
Profit after tax 364 672 840
Balance Sheet Trend Analysis

Description 2012–13 (Base Year) 2013–14 2014–15

Assets
Fixed assets (net of depreciation) 100% 132% 247%
Cash and cash equivalents 100% 250% 265%
Accounts receivable 100% 500% 700%
Inventories 100% 469% 703%
Total Assets 100% 218.8% 357.7
Equity & Liabilities
Equity share capital 100% 133% 167%
Reserve & surplus 100% 285% 515%
Current liabilities 100% 665% 1070%
Long-term borrowings 100% 168% 340%
Toral Shareholder’s Equity and Liabilities 100% 218.8% 357.7%

Particulars 2012-13 2013-14 2014-15

Assets
Current Assets
Cash and Cash Equivalents 40 100 106
Accounts receivables 300 1500 2100
Inventories 320 1500 2250
Fixed Assets 1900 2500 4700
Total Assets 2560 5600 9156

Shareholder’s Equity and Liabilities

Shareholder’s Equity
Equity share capital 1200 1600 2000
Reserve and surplus 364 1036 1876
Total shareholder’s equity 1564 2636 3876
Liabilities
Current Liabilities 260 1728 2780
Long term borrowings 736 1236 2500
Total Liabilities 996 2964 5280
Toral Shareholder’s Equity and Liabilities 2560 5600 9156
Appendix 4 - Ratio Analysis

Reference

• Goyal, V., & Mitra, S. K. (2016). Anandam Manufacturing Company: Analysis of Financial
Statements. Richard Ivey School of Business Foundation.