Anandam Manufacturing Company

Question 4

Operating Management Analysis

The gross margin show that a firm's product commands in the market, and the gross margin of the Anandam meet the industry average. However, by taking all expenses into account, the net margin of Anandam decreases from 0.18 to 0.11 during the three years, which indicates the company’s overall ability to manage all expenses was weakening, mainly because of the increase of depreciation and other operating expenses.

Asset Turnover Analysis

To assess working capital turnover, we compute operating working capital turnover and it can be noticed that in FY 2014/15 operating working capital turnover is extremely high, which shows that Anandam efficiently managed operating working capital to support sales with the increase of current receivables, inventories and current account payables during that fiscal year. However, the company has a low inventory turnover ratio that implies weak sales management compared against industry averages. Also, a lower receivable ratio suggests either that the collecting processes of Anandam is inefficient or that its customers face financial difficulty as indicated in the case.

To assess non-current asset turnover, we use total asset turnover and fix asset turnover. Generally, the higher the total asset turnover is, the better the company performs. Compared with industry average, the company does not show effective management performance. Compared with fixed asset turnover, which is about industry average, current asset turnover is much lower than benchmark, which may imply Anandam faces more serious problems in inventory and account receivable management.

Financial Leverage Analysis

From the perspective of liquidity, the current ratio is greater than 1 during the three years, which indicates that the book value of current assets is larger than current liability though it is still lower than benchmark. However, the acid test ratio, which excludes inventories compared to current ratio, is lower than 1 during FY2014/15 and FY2013/14, indicating that Anandam does not have enough liquid assets to pay off current liabilities.

From the perspective of solvency, Anandam uses borrowed funds to cover business operation. As result, Anandam’s interest coverage ratio is extremely low, and its long-term debt to equity ratio is far too high.

Cash flow analysis

From FY2012/13 to FY 2014/15, net profit of Anandam has increased remarkably from 3.64 million to 840 million. However, its net cash flow decreased dramatically from 0.4 million to 0.06 million, with a climax of 0.6 million achieved in FY2013/14.

CFO has increased in general but it is mainly due to an increase in accounts payable. Increase in accounts receivable and inventories though causes a bigger cash outflow compared with FY2012/13, it is roughly half lower than in FY2013/14. The heavy accounts payable liability may cause severe trouble to Anandam.