Professional Documents
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Graph 1 shows the financial performance of First Farms Corporation during the three-year
period (93 to 95)
As measured by peso sales and net income, we can say that First Farmers is
growing. In 1994, sales increased by 36.84% from PY balance, followed by another
increase in 1995 of 43.62%. Also, net income increased by 73.14% and 89.09% in
1994 and 1995 respectively.
5,683,133
5,242,607
3,957,039
3,603,856
2,891,656
2,664,017
85,607
Net Sales
Net income
280,256
60%
Percentage
40%
20%
0%
1993
1994
148,216
1995
Graph 2 shows the comparison of sales, costs and net income for the three-year period.
The graph shows how costs and profits behave directly with sales. As sales
increase, cost of sales and operating expenses also increase but as long as the
company reached its break-even sales, whatever additional increase in sales
contributes to profits.
Ratio Analysis
Profitability Ratios
70.00%
60.00%
50.00%
40.00%
Percentage
30.00%
20.00%
10.00%
0.00%
1993
1994
1995
AR - Trade
AR - Others
1,400,000
1,200,000
Inventories
1,000,000
800,000
Prepaid expenses
600,000
400,000
200,000
Other assets
1993
1994
1995
AR - Others
AR - Trade
90%
80%
Prepaid expenses
70%
60%
50%
Inventories
40%
30%
20%
Cash
10%
0%
1993
1994
1995
The graph shows that for the three-year period, the largest chunk of total
assets is attributable to its inventories (almost 40% of total assets in 1995),
followed by property plant and equipment (27% in 1995) and accounts receivable
(19% of total assets in 1995). While it is understandable that the inventory
comprises the largest amount because it is the source of revenue, still it must be
evaluated and determined if only the right level of stocks is maintained by the
company.
Financial Ratios
Liquidity
Although Current Ratio is satisfactory for the three-year period (1 and > than 1),
Quick Ratio is at 0.37, 0.43 and 0.61 for 1993, 1994 and 1995 respectively which
may imply that their cash and accounts receivable may not be sufficient to settle
their current liabilities.
Efficiency/Asset Management
The company proves to be inefficient in 1995 in managing their inventory and
accounts receivable. Inventory turnover in 1995 declined to 3.77x which extends
the conversion period of inventory from 64.79 days to 96.71 days which means that
more funds are tied up to inventory. Also, days sales outstanding increased from
27.05 days to 30.46 days which means a longer period to realize sales into cash.
Furthermore, total assets turnover decreased from 1994 which indicates a more
sluggish firm's sales.
The company is highly dependent on debt as shown in the ratio- more than
half of its assets is financed through debt. In terms of debt management, the
company is satisfactory in handling its debts in 1995, ratio of debt is to assets
decreased and payable deferral period is extended. Also, the company has 12x in
earnings to pay its interest which is a significant increase from 1994 figure.
Increase sales turnover The company must be more efficient in using its
assets to generate sales. It may do so by decreasing the amount of asset
used in achieving a certain level of sales.
Widen operating margins on sales - increase its prices (sales) at a faster rate
than the increase in its operating costs.
More leverage more debt means lower equity which will improve the
companys profitability. However, it exposes the company to certain external
risks due to the fixed costs of the interest charged by the lender and the
timely repayment obligations of the principal amount according to the
preferences of the lender.
Cheaper leverage - The cheaper the cost of borrowing, the higher it
contributes to improving a company's ROE.
Lower taxes - taxes can take a significant bite out of a company's profits and
thus ROE.