Anandam Manufacturing was a company established by Anand Agarwal in 2012. The company specialized in producing good-quality, reasonably priced garments for little girls. Since India was the second largest producer of garments in the world, Agarwal, used his experience and resources to secure machines, materials, an up and coming designer and a small team and started Anandam.
In the early stages of the company, Agarwal did a good job managing the details of the business, however as demand quickly grew it became more and more difficult for him to keep up. Primarily, limited liquid assets and financial resources became a challenge and Agarwal found himself borrowing in order to stay afloat. Other challenges Anandam faced included, the need for capital to purchase materials regularly, numerous credit extensions granted to customers that were not monitored or tracked, which impacted liquidity, overstock of inventory, inadequate factory space, no financial resources to purchase new manufacturing equipment and the need for additional employees.
Agarwal needed to take action to meet the demands of the customers, obtain new space and equipment as well as properly manage the company to make a profit. Putting together a detailed financial proposal with audited financial statements, he went to the bank to request a loan of $50 million to address his financial challenges and prepare the company for continued growth, as it was predicted that the textile material industry would hit its peak in 10 years (Goyal and Mitra, 2016).
Reading and analyzing the case, Agarwal had several factors working to his benefit. Some included his experience in the industry, his growth in the industry, his good credibility, the upward swing of the market, increased demand, dedicated staff and a vision and drive to take his business to the next level.
To determine if it would be in the best interest of the bank to approve the loan understanding Anandam’s financial position is essential to success or failure. Ratios are one method to identifying the financial health and position of an organization. Based on Anandam’s challenges computing ratios related to “liquidity, operating efficiency, profitability, solvency and valuation” will provide a clearer picture of the company’s financial position (Nguyen, 2018). The ratios results should be compared to the industry to determine if Anandam is above or below the standard, this is necessary to measure how the company is performing and if it is ready and stable enough for expansion. The table below lists the ratios analyzed for Anandam, its trends and industry position.
Type of Ratio 2012-13 2013-14 2014-15 Industry Analysis
Current Ratio 2.53 1.79 1.60 2.30:1 Anandam met the industry standard in its first year of business. However, for the 2014 and 2015 as demand increased it has been a struggle for the company to maintain liquid assets available to offset current debt.
Quick Ratio/Acid Test 1.30 .93 .79 1.20:1 Anandam had a quick ratio above the industry standard in its first year of business. However, it has become difficult for the company to quickly convert receivables to cash.
Accounts Receivable (A/R) Turnover 6 2.88 3.42 7 times Anandam has definitely struggled the last two years in collecting on its A/R. The industry average is to collect A/R 7 times per year. Anandam almost met the standard in its first year of business. With the excessive extensions to its customer and not tracking the company has experienced issues with collecting its A/R timely.
Receivable days 60 126.9 106.5 52 days On average, the industry collects A/R in 52 days. In its first year of business, the average for Anandam was 60 days. However, it has been a struggle for the company the last couple of years with collection occurring once in almost 6 months.
Inventory turnover ratio 3.11 2.56
4.85 times Anandam did not meet the standards in inventory turnover. While the company has high demands, the low inventory turnover implies that there is excess inventory or weak sales.
Inventory days 117 142 75 days This ratio goes hand in hand with the inventory turnover ratio. The industry has inventory in stock for 75 days before it is sold to the customer. In some instances, Anandam’s inventory days are doubled the industry standard. This is a financial burden on the company. The longer inventory sits the more money it cost the company to maintain.
Long-term debt to total debt 43 41 48 24% In this instance, Anandam LTD to total debt ratio is basically doubled the industry standard. This implies that Anandam has a sufficient amount of debt and could make it difficult for the company to borrow more money compared to the industry.
Debt-to-equity ratio 47% 29% 22% 35% For the first year, the company exceeded the industry standard but in the subsequent years, Anandam came below the industry standard. However, ratios too low could indicate that the company is not leveraging its increased financial profits.
Gross profit ratio 38 41 40 40% Anandam is doing well in it gross profit ratio compared to the standard. This is good because it indicates that Anandam is doing well in the industry is maintaining stability in the market.
Net profit ratio 18.2 14 10.5 18% The first year Anandam was right in line with the standard for the profit margin. The subsequent years it went down compared to the industry but the company has continued to make a decent profit after expenses.
Return on equity .30 .42 .42 22% While the industry standard is 22%, Anandam is able to generate profit without needing a lot of capital. But because the company does have quite a bit of debt that could cause the return to be high as well.
Return on total assets .23 .20 .17 10% Anandam is doing great on its return on total assets, which percentages in the first year double the standard. The company has maintained the ability to make money.
Total asset turnover ratio .78 .86 .87 1.1 Anandam is struggling a little in this area compared to the industry. Though no far off the differences could relate to the high numbers in inventory and A/R.
Fixed asset turnover ratio 1.1 1.9 1.7 2 The first year the company did not meet the industry standard but because they were just starting out, fixed assets were limited. But in subsequent years the company has done better with using its fixed assets to generate sales.
Current asset turnover ratio .78 1.2 1.1 3 Anandam is struggling a bit in this area compared to industry. The high inventory may be the reason for the low number in this ratio.
Interest coverage ratio (times
interest earned) 9.7 7.1 4.6 10 In its first year, the company’s interest coverage ratio was close to the standard. However, as expenses have increased the interest coverage ratio percentage has gone down to almost half the standard in the last year. This indicates that Anandam could be struggling to pay its interest on outstanding debt.
Working capital turnover ratio 5 3.5 4.8 8 The ratio decreased from the first year and then went back up during the last year. A low working capital ratio is an indication of issues with liquidity.
Return on fixed assets .20 .27 .17 24% Anandam is able to keep up in with the industry for this ratio, however, last year’s decrease is an indication that the return on the fixed assets in declining. This is in line with the company’s need to purchase more assets to keep up with demand as well as a new facility.
The analysis of Anandam’s financial position revealed several strengths and weaknesses of the company. Anandam’s strengths include its ability to keep gross profits stable with industry, obtain a return on equity, a return on assets, and earn a net profit. The results indicate the company’s operating performance is good. Consequently, the company’s weaknesses include its issues with liquidity, particularly A/R and inventory, which costs money and limits cash on hand. As a result, the company has a sufficient amount of debt that impacts the ability to maximize profitability in a market that is expanding and positioned for major growth in the market. Based on the analysis, my recommendation would be to loan the company the money, as its strengths put it in a position to succeed. The loan would support expansion, provide resources to purchase a new facility, assets, and equipment, purchase accounting software that will enable the company to track A/R and inventory and hire more staff.
The steps Anandam can make to improve its operating performance and set itself up for future success include:
• Developing a process for timely billing and implementing a system to track and monitor outstanding A/R. The sooner the company can collect on its A/R, the quicker payments can be converted to cash increasing current assets and liquidity.
• Developing a process for efficient production and tracking of inventory. This is essential to ensure the company is not ordering excess inventory but ordering only what is needed and utilizing the inventory on hand. This step will lower cost, thus increasing revenue.
• Hiring a full-time accountant to keep the books and track expenses.
• Developing a plan to pay back the debt to the bank and do everything possible to avoid borrowing more money.
• Producing monthly reports, so the company can monitor its progress, measure its success against the industry and make adjustments timely.
• Conducting continuous market research to identify where the market is headed and determine the company’s niche in the market to stay relevant and profitable.
Background Anandam Manufacturing was a company established by Anand Agarwal in 2012