The basis for financial planning, analysis and decision making is the financial information, which is needed to predict, compare and evaluate a firms earning ability. This financial information is provided in the companys financial statements or accounting reports i.e., balance sheet, income sheet and cash flow statement. Balance sheet and Income sheet are amongst the most significant financial statements, used to determine the financial condition and financial strength of a firm. Balance sheet provides information about assets, liabilities and owners' equity for a business firm as on a specific date. It reflects the financial position of the firm at the close of the firm's accounting period. Income sheet presents summary of revenues, expenses and net income of a firm. It acts a measure of firm's profitability. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheet and the income statements.
Blackmore is a leading supplier of equipments, plastic trays and other products to the commercial horticulture industry. It had recently increased plant capacity and had undertaken a new market campaign to go national. Despite of these efforts, it had faced great losses in the year 2008 and is concerned about its survival. Faisal, Blackmore's chairman, who is planning to bring back the firm into sound financial position, has appointed Hazza as his assistant. Examining the monthly data and comparing it with the annual data, Hazza found that the lags between spending money and deriving benefits were longer than that of Blackmore's managers had anticipated. Thus, they could see a hope for the company if it could survive in the short run. This study proceeds further, to help Hazza by analyzing the balance and income sheets of the firm and commenting on further proceedings.
Project Discussion
As mentioned above, financial analysis is the process of identifying financial strengths and weaknesses of the firm. There are various tools for performing financial analysis. These include: Ratio Analysis, Time Series Analysis, Cross sectional Analysis, Industry Analysis and Performa Analysis. Now, with the help of relevant tools; let us proceed further towards our study about financial health of Blackmore Company.
From the balance sheet of the Blackmore Company, the following details can be summarized:
Blackmore's sources of funds include equity as well as debts. The capital employed in the years 2007, 2008 and estimated 2009 values are as follows:
CE 2007: $1,952,352 + 400,000 = $2,352,352
CE 2008: $492,592 + 723,432 = $1,216,024
CE 2009 estimated: $663,768 + 323,432 = $987,200
It is clear from the above that in the year 2008, the firm has gone for larger debt source compared to 2007, and unable to generate the profits, has faced great loses. Estimating a lesser amount in the debt source seems to be a good sign for stabilizing the financial position of the firm.
It is extremely essential for a firm to meet its obligations as they become due. Liquidity ratios measure the ability of the firm to meet its obligations. The most common measures of liquidity are Current Ratio and Quick Ratio.
Current Ratio:
CR= Current Assets/ Current Liabilities.
It is a measure of the firm's short term solvency.
Quick Ratio:
QR= Current Assets- Inventories/ Current Liabilities.
Inventories are considered to be less liquid and require some time for realizing into cash.
The following table displays the liquidity ratios of Blackmore firm in the years 2007, 2008 and the estimated values for 2009.
2009E
2008
2007
Current Ratio
2.34
1.17
2.33
Quick Ratio
0.84
0.39
0.85
Blackmore Company Liquidity Ratios
Ratios in the above table indicates that the year 2008 has shown quite low figures compared to 2007, and the estimation by the experts for 2009 shows a hope for the good performance of the firm. In the year 2008, current and quick ratio being low, and as seen above debt source being larger; they faced great loses. Hazza can proceed with the estimated source, and try achieving the anticipated figures as per the estimated values regarding liquidity.
A firm should have a strong short term as well as long term financial position. To judge long term financial position of the firm, Financial Leverage Ratios are calculated as shown in the table:
2009E
2008
2007
Long term Debt Ratio
0.17
0.59
0.33
Debt- Equity Ratio
0.21
1.47
0.49
Equity Ratio
0.83
0.41
0.67
Blackmore Company Leverage Ratios
Observing the debt equity ratio, the estimated figure is quite satisfactory to maintain a good financial health. In the year 2008, the value of 1.47 of debt- equity ratio indicates that creditors have got a greater claim than owners, which implies a certain amount would be at a risk to be paid to the creditors and company in case of not reaching the estimated profits would have to face great loses as in this case.
The above discussed ratios are static in nature, and might not indicate the firm's ability to meet interest obligations. Interest Coverage ratio, which is computed by dividing earnings before interest and tax by interest charges, determines the firms' debt servicing capacity.
Blackmore Company's interest coverage ratio is as follows: 4.35, -0.96 and 7.03 for the years 2007, 2008 and 2009E. From the income sheet it can be seen that EBIT is negative for the year 2008 due to which the ratio also turned to be negative implying that minimum interest expense could also be not earned by the firm in that year. The 2007 figure is quite appreciable that it has earned 4.35 times the required expense and the estimated figure for 2009 also is sufficient to maintain sound financial position. So, Hezza should take care to reach the estimated EBIT for the year 2009.
Since most of the above ratios and their analysis says that the firm has to run efficiently to reach out the estimated figures for the year 2009 to have a profitable business; we now try to evaluate the efficiency with which the firm manages and utilizes its assets. These can be calculated with the help of Activity or turn over ratios. The following table displays the firms' activity ratios:
2009E
2008
2007
Current Assets turnover
2.63
3.13
3.05
Net Current Assets turnover
4.58
21.84
5.34
Fixed Assets turnover
8.61
6.42
9.95
Total assets turnover
2.01
2.10
2.34
Net Assets turnover
2.99
4.96
3.48
The above values in the table imply that a sale of Rs. 2. 63 can be generated from the capital employed of Rs. 1 on current assets in the year 2009E. In other words to generate a sale of Rs. 1 in the year 2009, the firm needs to invest Rs. 0.38 investment in current assets and Rs. 0.12 in fixed assets. But these ratios alone cannot reflect the efficiency of the firm, since it depends on the liabilities as well. For example, in the year 2008, though it is seen that the turn over ratios of all the assets except for fixed assets are high; still it is said that the firm faced great loses. This is because the firm has invested remaining percentage through debts and hence has faced great loss irrespective of the high turnover ratios. Having a optimal ratio of debt to equity in the year 2009, the efficiency of the firm is satisfactory and should be maintained as per the estimation.
Further the firms' earning power can be determined with the help of profitability ratios. DuPont Analysis helps in evaluating this. These profitability ratios can be determined with respect to sales or investment. The following table shows the Blackmore Company's analysis of earning power:
2009E
2008
2007
Net Assets turnover
2.99
4.96
3.48
Gross Margin
0.16
0.08
0.17
Operating Leverage
0.42
-0.26
0.34
Return on Net Assets
0.21
-0.11
0.19
Return on Equity
0.13
-0.33
0.13
Blackmore Company's Analysis of Earning Power
Looking at the Gross Profit margin, we can see that cost of goods and sold has increased in the year 2008 which has given a significant impact in reducing the gross profit. Further the operating and administrative expenses have also increased and thus landed up with negative EBIT. The operating and administrative expenses occurred in the year 2008, could not generate profits to maintain financial position. But looking at the estimated figures, the profits are seen in the next year and were sufficient and satisfactory as discussed above with the help of various ratios. Thus as well found by Hazza, it is that the lags between spending money and deriving benefits were longer than Blackmore's managers had anticipated, could be the major problem as discussed above. So the management has to concentrate more on the current asset turnover and concentrate its investment accordingly to see the benefits and bring sound financial position back in the firm. Since the estimated values generate good profit and as found above, those figures would be leading to an efficient firm. Thus, they have to concentrate on achieving these figures. As well estimated, debt source can be reduced and large amount can be invested on current assets, to derive benefits and run the firm successfully.
Conclusion:
Thus, from the above study and analysis of various ratios it is clear that the firm is growing compared to the year 2008. The reasons behind the loses faced in the year 2008 could be that it has financed high amount through debt, decreased the amount of retained earning and utilized these amount into increasing the plant capacity and in marketing campaigns. These don't give an immediate impact, thus added up to the expenses without having any immediate positive profits. This could not be anticipated by the firm, which led to great loses in the year 2008. The benefits could have started affecting the market which led to good estimation of sales without any extra expenses leading to profits. Thus, in future the firm should take care while investing in such expenses keeping in mind the estimation of earnings that would be made in that particular year and anticipating the lags between the investments made & benefits that would be obtained. Since as discussed above, overall the firms' financial position would be sound and healthy if it achieves the estimated targets for the year 2009, it should be trying to achieve the same while taking care of above mentioned points. Hazza should concentrate more on achieving the estimated values for the future and should be more careful while investing in such marketing campaigns looking into the impact period. Overall, by the end of the year 2009, Blackmore would be able to sound and healthy financially.
Recommendations:
This study would have been more effective, if the cash flow statement and the cost of goods sheet were provided. Also since the company is broad in its products, it would have been more effective if the nature of marketing campaign undertaken is also mentioned to assess its impact on the customers. Overall, the given data is sufficient to analyze the firms' financial position and to comment on the issues required.
