Even the financial statements are given in the current scenario, the financial state cannot be fully interpreted just based on the information appear on the financial statements. Those information needs to be further to be analyzed to review and interpret the most appropriate financial state of Anthony’s Orchards.
As the basic information given in the operations, Anthony’s Orchards conducts three basic operations with in the same business in order to generate revenues
- Prepared apple Products
- Pick your own Apples
- Community Events
And the cost structure consists of 2 main costs
- Manufacturing cost
- Non-Manufacturing cost – Administrative cost.
The following financial aspects have been further analyzed to determine financial state of the company
The assessment of financial health can be done by analyzing the performance under four broad categories:
- Cash Flow
This ratio indicates how profitable a company is at the most fundamental level and is calculated as (Gross Profit / Revenues). So currently company is having 18% of gross profit ratio. That means the company is in a moderate position. If it is further analyzed, three operations have different contributions to the gross profit ratio such as
- Prepared Apples 12%
- Pick your own Apples 17%
- Community Events 39%
But more resources have been used to “Prepared Apples” which is giving the least profitability at fundamental level. So Anthony’s Orchards can utilized resources more profitably limiting to the capacity.
This ratio indicates what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc (EBITDA/Revenues). So the company is currently having 8.15% ratio which suggests a less strong position. Main reason is high administrative costs.
This ratio Indicates how much profit a company makes for every dollar it generates in revenue (Net Profit/Revenues). So currently company is having 4% of NP ratio that is not a sign of healthy company. Company having high interest expenses and taxes makes a lesser ratio than EBITDA ratio.
This ratio indicates how efficiently the management using its assets to generate earnings (EBIT (1-t)/Assets). Company has a ROA of 9% at the moment. So the assets has been utilized only to generate 9% of returns and it is not strong position to recommend as financial healthy
This ratio indicates the firm’s ability to meet short-term obligations from short-term assets employed in the firm (Current Assets/Current Liabilities). Company has a current ratio of 3.21. That means company is very strong in paying back short term liabilities using current assets of the company.
This ratio indicates the firm’s ability to meet short-term obligation from short-term liquid obligations employed in the firm (Cash and Short term investment) / Current Liabilities). And Anthony’s Orchards is currently having a very strong position of 1.83. So the company is financially healthy to settle all the current liabilities using liquid current assets.
Tis ratio indicates the firm’s ability to meet the interest expense from earning generated by the business (EBITDA / Interest Expense). Since interest rate is the cost of external equity, this ratio gives a clear indication of how many times of interest expense which company can afford.
This ratio indicates the proportion of debt capital with respect to equity capital employed in the business (Total Debt / Total Equity).Company is currently having 0.92. This is a fine ratio for the company since the internal capital is capable of paying external capital.
This ratio indicates the proportion of total liabilities with respect to total assets in the business s (Total assets/Total Liabilities). Anthony’s Orchard is currently having a ratio of 2.09 which suggests a very financial healthy position for the business.
So the business financial health is not strong in profitability. But it is strong in Liquidity and Leverage
As seen in the financial statements company has a fluctuation in direct labor cost which is non-pattern. From 2010 to 2011 there is a decrease of the labor cost of (12.66%).but importance is that there is a 0.05 decrease of per labor rate. Furthermore from 2012 budgeted cost there is a non-significant increase in labor cost (0.56%).
Unlike the labor cost, there is a 49% increase of the material cost from 2010 to 2011 period. The main reason behind the huge increase is that company has started the “community event Operations” from 2011 which needs only direct labor. 2012 budgeted material cost shows 8.65% increase of the material cost basically increase cost of prepared Apple operations
Income statement reveals that there is a significant growth in both revenue and cost of goods. And the ratio does not have a significant difference. (Revenue 31.37% & Cost of Sales 30.79%).So the impact for the profit is basically due to the volume. It can observed from the increase of (36.28%) of gross profit ratio and increase of (39.98%) net profit ratio. The highest revenue component is prepared apple operation which is 72% of the total revenue
It can be analyzed that there is a constant cash flow of the company except few abnormal cash outflows throughout quarters. The only cash inflow of the company is the cash received from sales. There is huge cash out flow in the 1st quarter due to prepared apple operations which leads to a negative cash flow at the end of quarter. But rests of the quarters are steady and it balances out the negative balance. Main cash out flow is direct material purchase.
Out of the 3 operations Anthony’s Orchards, The most contributing department is the prepared apple (60%). But it consumes most of resources as well (65%). It can be noted from the least profitability ratio (12%). Even though community events contributes less (17%) , it has a high profitability of (39%). Pick your own apple operations also contribute significantly by 22% but with a less probability (17%).
CVP analysis means the contribution, variance cost and profit analysis. As the above case we cannot determine the absolute CVP since there are 3 operations and limiting factors have not been given. So based on the assumption that there is no difference between products, Contribution per unit was 195.26 and the break even units are 7196 apples.
So the company is currently selling 13250 Apples which is way above the profit margin. So company has profit margin of (13250-7196) = 6054 units in 2011 year
The above given scenario is that a customer is cancelling the order who is 25% buyer of prepared apple. So the budgeted impact will be
- Revenue from prepared apple will be decreased to 6,561,938
- Cost of Goods will be decreased to 5,769,161
- Gross Profit will be decreased to 792,776
- Cash flow will be decreased from 264,259 (due to the reduction of direct material cost)
Furthermore this will have not a significant impact on administrative cost. And there will be impact on net profit and due to the reduction of taxes since gross profit is decreasing.
One more thing that can be considered during the budget is, the resources which is saved from the cancellation can be utilized in more profitable operation where it will generate more profits to Anthony’s Orchards.