Anandam Manufacturing Company - Analysis of Financial Statement

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V. Conclusion and Recommendation

I. Liquidity

A. Current Ratio

It is highly recommended that the company must implement a faster conversion cycle of debtors or accounts receivable because faster rolling of money via debtors will keep the current ratio in control and a constant follow up with the debtors can improve the collections from them. It is also recommended that the company must improve current asset by rising shareholder’s funds because when the current assets are financed by equity rather than the creditors, the level of current assets would increase with current liabilities remaining the same.

B. Quick ratio

The company is recommended to improve its inventory turnover ratio because by quicker conversion of inventory into debtors and cash, the quick assets would rise resulting in an improvement in the quick ratio. On the other hand, the company is also suggested to discard unproductive assets because reduction of such assets would result in better cash position thus, improvement in the numerator of quick ratio. In addition the company can also improve the collection period of its accounts receivables because Reduction in collection period will have a direct impact on the quick ratio. Lower collection period means faster rolling of cash. Improvement in collection period can result in a number of debtor’s cycle during the year resulting in better current assets.

C. Accounts receivable turnover

The company should revise its policy on credit collection. The company must reduce the time frame a customer is given to pay a bill to improve the ratio. The company must also revise credit policies to send invoices out immediately. The company is also recommended to follow-up on collections of accounts receivable and lastly the company must monitor the ART ratio because it indicates whether activities implemented are having a positive effect on the accounts receivable turnover.

D. Days Sales Outstanding

The company must improve its credit term policy. The company must also implement timely billing because the longer it takes for a customer to get an invoice, the longer it takes for them to get your cash. They need to have a structured system to keep track of such credit dispatch extensions in order to prevent future delay in collection.

E. Inventory Turnover

The company is recommended to set a better overall price for the products to increase demand, which in turn boosts sales and inventory turnover. Either establish a temporary discount or set a more permanent lower price for slow-selling merchandise. The company is also recommended to call distributors to seek a better price for the products or materials you buy, to reduce your inventory investment.

F. Days’ Supply in inventory

The Company is highly recommended to review its policies in managing the inventory of the firm, review the system that is needed to be change. Collection credit policy must also be improved and the company must put certain system for effective collection from the clients.

G. Debt to equity ratio

The Company is recommended to plan well in borrowing money. The company must make assumptions regarding its future status because by doing so the company can be aware on borrowing just enough to cover up their debts. Assumptions includes taking on debt in the belief growth will increase revenue, which will let you keep the debt/equity ratio stable. The company must consider the worst case scenario where the revenue growth is substantially under what you expect. The company should consider the fact that if it happened, it could maintain the debt payments without seriously cutting into the cash flow.

H. Times Interest Earned ratio

Based on the given analysis it can be recommended that the company should improve its credit policy for them to immediately raise funds. The company is also recommended to plan very well to avoid borrowing to much that leads to a risk in terms of paying its obligations.

I. Total Asset Turnover Ratio

The Company is recommended to increase revenue, the assets might be properly utilized, but the sales could be slow resulting in a low asset turnover ratio. The company can increase its sales by more promotions and by quick movements of the finished goods. The company is also recommended to Liquidate its assets, assets that are not used frequently, should be analyzed to see whether there is a sense in retaining those. Basically, the company should sell those assets that do not add to the bottom line regularly.

J. Fixed Asset Turnover

The company is highly recommended to improve efficiency, the company should analyze how the assets are used and ways to improve the productivity of each asset. The output should increase without any significant increase in any other expenses.

K. Gross Profit ratio

Based on the result the company is already stable and there is no need for recommendation.

L. Net profit (NP) ratio

The company is highly recommended to analyze its customers a breakdown of the types of customers your business serves should allow you to determine what customers are in that most profitable group. Focus on offering the services or products these customers buy. You may even decide to eliminate those products that your ultimately unprofitable customers tend to purchase. The company is also recommended to Analyze its product line up, with the selection of products you sell, you have several ways to increase your profit margin. You can adjust prices upward to increase the gross profit margin, or you might want to lower some prices to increase the volume of sales and the net profits. Thus, through this the company can improve its net profit ratio.

M. Return on equity ratio

Based on the result the company is using its investors' funds effectively, thus, there is no need for any improvements.

N. Return of Total asset

Based on the given analysis the company is efficient in converting money used to purchase assets into net income, thus, there is no need for any improvements.

Conclusion: