Ateneo de Zamboanga University School of Management and

Accountancy
Accountancy Department
ANANDAM MANUFACTURING COMPANY: ANALYSIS OF FINANCIAL STATEMENTS
In partial fulfillment of the requirements in
FINANCE 211: FINANCIAL MANAGEMENT, PART I

Presented to:
MR. JOHN CARLOS S. WEE, CPA MBA
Instructor

Presented by:
JOLINA B. BANZON ROMEL W. DELOSA MARK VENDOLF B. KONG
JHON EDMAR B. LARAWAN RICHIE D. SABAC

October 16, 2017

I. Case Summary
Being the second-largest producer of garments in the world, India is home to
various garment manufacturing companies which exports high quality materials all over

the world. The industry has been expanding in the past year and is projected to continue
blooming in the succeeding years which caused companies to undergo rapid growth. One of

these promising companies is the Anandam Manufacturing Company, which experienced a

drastic increase in both revenue and taxes in the past three years. The drastic increase

prompted Anand Agarwhal, owner of the said company, to approach the local bank for
additional funding to meet the growing requirements of the company. Agarwal discussed

with the bank manager the rapid development of his company and the promising growth of
the garment industry in the country. The company urgently needed the additional financing
of Fifty million Indian Rupees to meet the cash and investment requirements of the
business and to continue with smooth operations and expansions.

II. Objective of the Analysis

To properly analyze the financial health and stability of the Anandam Manufacturing
Company through interpretations made from financial ratios of which information was
derived from the company’s audited statement of profit or loss and audited statement of financial
position of the said company as shown in the exhibits 1 and 2. The interpretations

will be based on the industry average of key ratios as computed by the authors using the
Prowess database from CMIE found in exhibit 3. This analysis will serve as a guide in

assessing whether the applicant is truly eligible to receive the loan and that such company
can make repayments with interest on time.

III. Outline and Assessment of the Internal and External Environment of the
Company
Strengths
 Three years experience in specializing formal party dresses for girls up to 12 years

of age
 Provides innovative and modern garments to customers at reasonable prices
 Composed of skilled laborers and a qualified textile engineer with 12 years

experience in the local garment manufacturing company

 Good credibility in the Textile and Garment Industry

Weaknesses
 Mainly depends on mortgage loans to satisfy its short-term and long-term

requirements
 Rapid expansions in subsequent years noticeably increased the short-term and
 long-term requirements which requires higher mortgage loans entered
 Excessive credit periods granted to customers
 Insufficient factory space, larger location is essential
 Urgency of cash for purchases of raw materials and machineries required for

manufacturing
 Outdated technology and reluctance to implement new technologies
Opportunities
 Promising growth of Textile and Garment Industry in India
 Increasing demand in both domestic and foreign markets
 Growth of the retail sectors due to increases in the consumerism and disposable

income.
 Increased opportunity for exports due to favorable trade policies
 Increases in per capita income and demographic distribution

Threats
 Highly competitive markets and increasing influx of competitors
 High transportation costs
 Shortage of energy and simultaneously increasing costs of energy
 Ambiguous and obsolete labor laws
 Lack of economies of scale

IV. Analysis and Comparison of the Financial Position and Results of Operation of the
Company
EXHIBIT 4

2012-13 2013-14 2014-15

Current Ratio 2.54 1.79 1.6

Quick Ratio 1.31 0.93 0.79

Receivable Turnover Ratio 6 times 2.88 times 3.42 ties

Day Sales Outstanding 60 days 125 days 105 days

Inventory Turnover Ratio - 3.11 times 2.56 times

Inventory Days - 116 days 141 days

Long-term Debt to Total Debt

Ratio
74% 42% 48%

Debt to Equity Ratio 47.06% 46.89% 64.50%

Gross Profit Ratio 38% 41% 40%

Net Profit Ratio 18.20% 14% 10.50%

Return on Equity 30.33% 42% 42%

Return on Total Assets 14% 12% 9.00%

Total Asset Turnover Ratio 0.78 0.86 0.87

Fixed Asset Turnover Ratio 1.05 1.92 1.7

Current Asset Turnover Ratio 30.03 1.55 1.8

Times Interest Earned Ratio 9.67 7.08 4.53

niversity School of Management and
t
NANCIAL STATEMENTS
ts in
PART I

NDOLF B. KONG
ABAC

ts in the world, India is home to

rts high quality materials all over

projected to continue
go rapid growth. One of

y, which experienced a
ars. The drastic increase

roach the local bank for

ny. Agarwal discussed

he promising growth of
the additional financing
 requirements of the

he Anandam Manufacturing
which information was
d audited statement of financial
nterpretations

he authors using the

will serve as a guide in

and that such company

Environment of the

irls up to 12 years

reasonable prices
engineer with 12 years

rm and long-term

sed the short-term and

 entered

chineries required for

hnologies

erism and disposable

olicies
on

of Operation of the

INDUSTRY
2.30:1

1.20:1

7 times

52 days

4.85 times

75 days

24%

35%

40%

18%

22%

10%

1.1

10
Working Capital Turnover Ratio - 5.42 2.21

Return on Fixed Assets 19% 27% 18%

LIQUIDITY
The liquidity of the company is very low and it decreases from time to time. The current
ratio of the company for the year 2012-2013 is 2.54% higher than the average. However, for the
year 2013-2014 it drop to 1.79% and it decreases by .19% for the year 2014-2015 showing a
1.6% current ratio. The company is far behind the other company in terms of liquidity, having
1.6% for the year 2-14-2015 compare to 2.3 to one current ratio of an average.
The ability to utilize their quick assets to satisfy their short-term obligations is
decreasing throughout the period. The company is doing great for the year 2012-2013 with a
1.31% quick ratio .11% higher than the average. Unfortunately, it significantly decreases by
.38% for 2013-2014 periods, from 1.31% to .93 quick ratio for the year 2013-2014. For 2014-
2015, the company has a quick ratio of .79%. This data shows that the company has insufficient
quick assets to be converted to satisfy their current liabilities.
EFFICIENCY
The accounts receivable turnover measures the effectiveness of the company in
extending credit and its collection on that credit. For the first period, the company is stable in
terms of their AR turnover with the capability to collect its receivables 6 times . However, it
decreases after two periods. The ratio drops to 2.88 times, such a significant decrease, and it
rises by .54% as the operation continues for the third period, with a AR turnover of 3.42.
Overall, the ratios presented for three periods are not showing good result especially when
compared to the average of 7 times despite the increase. Perhaps they should work harder in
implementing their collection policy.
The company’s days sales outstanding for the receivables for three periods are higher
than the industry’s, thus, it really shows that the company has a poor policy implementation in
collecting their receivables. As shown below, the company has 60 days for the year 2012-2013
it increases to 125 days for 2013-2014 and it decreases by 20 days for the year 2014-2015 with
days sale outstanding of 105 days. Compare to the 52 days of the industry, the company
perhaps is not into strict implementation of their credit policy because the data shows poor
result towards their collection.
Anandam Corporation’s inventory turnover measures how effective the company is in
the management of its inventory. The inventory turnover ratios for three periods are lower
than the industry average ratio. The drop of inventory turnovers from period to period shows
that the company is weak in selling their garments in the market, and it may result to excess
inventory.
The days supply in inventory measures the days from the moment the inventory was
purchased to the day it was sold. The company’s days supply in inventory is way higher than the
industry’s average ratio. For the second and third year, the company has 116 days and 141
days, respectively higher than the 75 days of the industry average ratio.
LEVERAGE
The company has a higher portion of long term debt to its total debt. With 74% of its
total liabilities are long term debts for the first year. It drops by 32% for the second year, from
74% to 42%. However, it increases to 48% for the third year. The average ratio or percentage is
25% which is way lower than the company’s.
The debt to equity ratio shows how the company uses its debt to finance its equity. The
debt to equity ratio shows an increasing trend, from 47.06% for the year 1 to 46.89%,
immaterial decrease, of year 2 to 64.5% of year 3. It shows that the company is aggressive in
financing their assets with debts. Perhaps the company is a risk taker because the higher the
debt to equity ratio the riskier it becomes.
Total asset turnover is an efficiency ratio that measures the company’s ability to
generate sales from its assets. The company’s total asset turnover is at increasing trend,
however, it is lower compare to the 1.1 of the industry average ratio. This shows that the
company is not using its assets efficiently or there is some problem with asset management.
The fixed asset turnover of Anandam Company for year one is 1.05 lower by .95
compare to the average. For year two, it increases to 1.92 closer to the 2 of the average.
Unfortunately, it drops to 1.7 for year 3. The company is inconsistent with their efficiency in
utilizing their fixed asset in generation profits.
PROFITABILITY
The company is stable with their gross profit ratio from 38% of year 1 to 41% of year 2
to year three’s 40% the decrease is insignificant. This shows that the company sells their
inventory with a higher gross profit rate, more or less 40% of the cost. It benefits both the
company and its shareholders.
Net profit ratio shows the percentage of the this year’s net profit to its net sales. As
shown the company’s net profit is decreasing from year one to year three. The company’s net
profit for 2012-2013 is 18.3% of its net sales. It decreases drastically to 14% of year 2 and it
further decreases to 10.5% net profit ratio of year 3. The company has a problem with their
profitability with a decreasing trend to their net profit ratio. Also, compare to the 18% of the
industry average, the net profit ratio of Anandam company is way lower.
The return on equity of the company shows good result. Return on equity measures the
ability of the company to generate profit from the investments of their stockholders. The
company’s returns on equity ratios for the three periods are 30%, 40%, and 40%, respectively.
These are higher than the 22% of an average industry’s return on equity. This shows that they
use their shareholders’ investments effectively to generate profit and it gives a good impression
to the investors and to the potential shareholders.
 Return on total assets is used to measure the ability of the firm to convert the money
used to purchase assets into profit. The company has a decreasing ROA for the three periods,
from year one’s 0.14 to 0.12 of year two to 0.9 of year three. Compare to 0.10 of an average
industry we can say that firm uses the assets effectively to generate profit despite of its
descending movement.
Working capital turnover ratio measures the efficiency of the company in using their
working capital to generate profit. The working capital turnover ratio of Anandam Company is
5% in year one, 3.5 in year two, and 4.77 in year three. These ratios are lower than the average
working capital turnover ratio of 8. This indicates the inefficiency of the company in utilizing
their working capital to generate profit.
V. Conclusion and Recommendation
On the short-term, the goal of the company must be about being liquid. It is not
recommended to loan today because of the possible increase in the interest. The times interest
of the firm is very alarming because it means almost or third of their operating profit goes to
interest. What the company needs to do right now is to restore its liquidity first before getting a
loan. It means the company must have more cash collection to pay its short term liabilities. The
potential of the firm is when they can have more cash, they can have more money on short
term to pay their interest.
The liquidity position of the company poses an uncertainty on their ability to repay their
loan and pay the interest. Provided that they are also inclined to debt financing, it places the
company in a risky condition. They also seem inefficient in their collection of receivables and
falls behind the industry’s standard. Furthermore, in the view of profitability, the company also
failed to meet the industry’s average which gives us a hint of how the company manages it cost
in operations. Though the company shows promising growth in the future. There seem to be a
problem in their management of operations. As a financial institution, we should not only look
at the most basic factors in providing loans to companies, especially loans in large amounts. We
must also look at the company’s liquidity, profitability, stability, and also the external factors
that may increase the risks further which will not bode well for us. By looking at these factors
and cross checking them with the current status of Anandam Manufacturing Company, we can
say that currently, disregarding the various forecasts of analysts, Anandam is slowly declining in
its operations and faces risk in its inability to collect its own receivables from its customers.
Also, it may potentially face unexpected problems from the replacement of its old equipment is
not a good sign for Anandam.
 8

24%

m time to time. The current

verage. However, for the
ar 2014-2015 showing a
ms of liquidity, having
verage.
eir short-term obligations is
ear 2012-2013 with a
significantly decreases by
2013-2014. For 2014-
ompany has insufficient

veness of the company in

e company is stable in
ables 6 times . However, it
ficant decrease, and it
h a AR turnover of 3.42.
od result especially when
should work harder in

r three periods are higher

olicy implementation in
for the year 2012-2013
he year 2014-2015 with
e industry, the company
ause the data shows poor

effective the company is in

r three periods are lower
eriod to period shows
may result to excess

e moment the inventory was

 ry is way higher than the
any has 116 days and 141

tal debt. With 74% of its

the second year, from
ge ratio or percentage is

bt to finance its equity. The

he year 1 to 46.89%,
mpany is aggressive in
ecause the higher the

the company’s ability to

is at increasing trend,
atio. This shows that the
th asset management.
one is 1.05 lower by .95
to the 2 of the average.
t with their efficiency in

of year 1 to 41% of year 2

the company sells their
cost. It benefits both the

net profit to its net sales. As

ee. The company’s net
to 14% of year 2 and it
has a problem with their
are to the 18% of the
r.
urn on equity measures the
their stockholders. The
and 40%, respectively.
y. This shows that they
gives a good impression
rm to convert the money
for the three periods,
to 0.10 of an average
ate profit despite of its

f the company in using their

Anandam Company is
lower than the average
of the company in utilizing

bout being liquid. It is not

erest. The times interest
erating profit goes to
dity first before getting a
hort term liabilities. The
ve more money on short

n their ability to repay their

financing, it places the
on of receivables and
ability, the company also
ompany manages it cost
ure. There seem to be a
we should not only look
ns in large amounts. We
also the external factors
ooking at these factors
uring Company, we can
am is slowly declining in
vables from its customers.
nt of its old equipment is