Introduction
This paper seeks to conduct an in-depth financial analysis for the hypothetical entity Horniman Horticulture with a specific focus on highlighting the overall financial health and performance of the business over the period between 2002 and 2005. The analysis will be centered on selected ratio analyses, increasing and decreasing financial situations over the periods and situation analysis.
Over the period under review, the financial performance of the business has exhibited various trends evidenced by the results reported for each year. For instance, the total annual revenues for the business have gradually increased over the four-year period from $ 788,500 in 2002 to $807,600 in 2003, $908,200 in 2004 and $ 1,048,800 in 2005. The business growths in revenues have been 24% in 2003, 12% in 2004 and 15% in 2005, that being the annual growth in revenue in regard to the previous year.
The gross cost of goods sold over the four years also displays a proportional increase in the total revenues generated and so the gross profits. Costs associated to the sale of goods increase from $ 402,900 in 2002, to $ 428, 800 in 2003, $ 437,700 in 2004 and $ 503, 400 in 2005. This commensurate increase in the costs of goods sold with the increasing sales revenue causes the replication of a similar trend in the gross profits generated over the years. The business, however, displays an inconsistency in the management of the operating expenses, and this compels the business to report a similar inconsistency in the net profits generated. The net profits fall from $ 32, 600 in 2002 to $ 25, 300 in 2003 then rise to $ 52,000 in 2004 and $ 60,800 in 2005. The main source of the fluctuations is triggered by the inconsistent depreciation charge which increases in the second year, decreases in the third year and increases again in the fourth year alongside a rising SG &A expense.
The balance sheet of the business displays a declining trend of the total cash held by the business over the four years alongside an increasing amount of accounts receivables. This is a clear indication for the business reliance on credit mode of selling and a slow debt collection rate. The total accounts receivable increase from $ 90,600 in 2002, $ 99,500 in 2003, $ 119,500 in 2004 and $ 146, 400 in 2005. This fluctuation in cash, inventory and accounts receivables is countered by a staggering trend of other current assets to result in a slow increase in the total current assets held by the business. The fixed assets held by the business increase in the second year from $ 332,100 to $ 332,500, $ 384, 300 in 2004 and fall to $ 347, 900 in 2005. The total assets held by the business similarly increases gradually from 2002 to 2005.
The business performance displays a gradual increase over the years from $ 35, 900 in 2002 to $ 47, 300 in 2005. The capital expenditure for the business increases from 2002 to hit a maximum of $88, 100 in 2004 and declines to $ 4, 500 in 2005. From the balance sheet figures, it’s possible to deduce the fact that the business has a weak credit management system due to three continual escalation of the accounts receivable and a decline in cash held. The business purchasing strategy is more dependent on cash and thus the persistent decrease in the total cash alongside an inconsistent payables account.
Ratio analysis
These are financial calculations that reveal the financial viability of the business and give a replica of its performance over the periods under review. They include the current ratio which is obtained by taking the total current assets and dividing by the total current liabilities held by the business at any specific time. This ratio indicates the extent to which a business is able to service its existing current liabilities with the total current assets held by the business at that time. Over the four years, the ratio fluctuates from 19.5 in 2002 to 17.12 in 2003, 16.95 in 2004 and 17.62 in 2005. These figures indicate the total number of times the business can settle its current liabilities using the current assets only. From the analysis, the business is in a stable position due to the fact that it can comfortably meet its current liabilities without touching the fixed assets or incurring extra debt (Vandyck, 2006).
The gross profit margin is the outcome of dividing the entity’s gross profits generated by the total sales revenue earned in that period. It indicates the business’ ability and efficiency in its inventory management and the skill of effective cost allocation to the final output. An increasing GP margin indicates an increasing level of business efficiency while a declining margin indicates a dismal performance. The margin declines in the second year from 0.49 to 0.47 in 2003 and then stabilizes at 0.52 for the two last years.
The net profit margin is obtained by dividing the net profit earned by the total sales, and it indicates the overall financial gain derived from the business from each unit sale/ dollar. An increasing or high margin indicates a higher degree of efficiency in the business’ ability to generate profits from the sales made (Vandyck, 2006).
Return on equity indicates the overall gain derived by the business owners as a reward for their funds invested in the entity. The ratio declines from 0.03 in 2002 to 0.02 in 2003 and rises to 0.05 in 2004 and 2005 collectively.
Conclusion
The overall financial analysis for Horniman Horticulture over the four-year period indicates a relative stability and favorable financial health for the entity. The main item of concern is, however, the inconsistency displayed by the continuous fluctuation of the financial ratios. A significant ratio of the return on equity could be detrimental to the business’ reputation on investors who may be reluctant to pump more investment into the business due to its inconsistency and fluctuations. The business cash management is also wanting as evidenced by the continuous decline in the total cash held. The business also has a notably poor credit management, debt collection and purchasing policy. This is responsible for the increasing amounts receivable and inconsistent amounts payable.
References
Vandyck, C. (2006). Financial ratio analysis. Victoria, BC [u.a.]: Trafford Publ.
