Green we look at the details we

Green gooseWe have the data of P&L statement and Balance for last 5 years and sector averages for the mostimportant lines of P&L. We are asked to perform horizontal analysis of these data to evaluate thefirm financial performance over last 5 years and see how the last year – 2015 compares to the sectordata. We perform this analysis „from general to detail” meaning that we look at the result lines suchas GP, Operations Costs etc. first and then we look for explanation of variances by analyzing detaillines.In the general perspective, taking look into account NTS, we see during all period of time, it rosesteadily simultaneously with COGS, moreover, the COGS grew faster that are negative factors for thecompany's gross profit which decreased when COGS grew. In comparison with 2011 and 2012 whenGP comprised almost 38%, it decreased in 3 years to not quite 37% in year 2015 . Unfortunately, nowwe can not see the reason for these changes in detail.The next result line is Operation profit. During 5 years we can observe that the Operating profit fellby 3,9% in 2015 compare to 2011. Looking at detail cost lines we notice that the A&P grew by 2.3%in 2015 in comparison with other costs. It means that the company spend more its budget to attractmore customers by advertising and promoting its products or services.Next result line we will analyze is IBT. In 2013 it drops by 5 %. This is obviously a result of operatingcosts increase and GP decrease at the same time, but there are some other factors influencing IBT.When we look at the details we see significant increase – to 906- of Other costs line and incomparison to 2011 when it only made 100. The main item in Other cost category is bad debtreserve. If such a big increase of Other costs is indeed caused by the bad debt reserve we shouldobserve significant increase of Accounts Receivable. Our Balance Sheet data show that, in 2013,Accounts Receivable grew abruptly by more than 5 thousands, or about 22% compare to 2012.At the same time our sales grew only by 4,4%, so AR grew in five times as fast as the sales. We canassume therefore that either the firm’s collection process is ineffective or it deliberately extends itscustomers’ payment terms using it as an additional tool in its effort to grow market share. Suchpolicy negatively influenced firms liquidity. We can see the effects of this policy in sudden increase -about 63%- of the overdraft and significant – around 16 %- increase of Accounts payable. AP grewfour times faster than the sales. If we calculate Quick ratio indicator, we will see that despite thatfact that in the previous 2 years (2011 and 2012) the proportions were less than 1, in 2013, its value -0,88- drops significantly that it was before. Quick ratio supports our conclusion that the firmexperienced liquidity problems from 2011-2014. In addition, taking a look at working capital, it isclearly seen that during the whole period of time, the company had enough short term assets tocover its short term debt (because of overdraft and AP). In details, this indicator from 2012 to 2015was not more than 1.96.Inventories, the second big cash eater and we can see that though in 2012 and 2013 this indicatorrose only by 3% and 5%, in 2014 it increased dramatically by 22% in comparison to previous years. Atthe addition, inventory turnover indicator showed that the inventory turned almost 2 times a year,and is on hand approximately 202 days. It means that company had weak sales and, therefore,excess inventory. The speed with which a company can sell inventory is a critical measure of businessperformance. Therefore, If this inventory can’t be sold, it is worthless to the company. As a result,We can conclude that the inventory management could add to liquidity problems and a low ratioimplies that the company should remake its credit policies in order to ensure the timely collection ofimported credit that is not earning interest for the firm.Other main indicators are Sales growth, Quick ratio and RoS confirm our conclusions:2011 2012 2013 2014 2015Sales growth ____ -1,30% 4,20% 3,20% 3,10%RoS 10% 9% 6% 6% 6%AR 5,07% 21,80% 16% 9,90%AP 7 15,8 4,5 9,41Quick ratio 0,99 0,93 0,88 0,97 1,04Summarizing, the firm chose aggressive strategy of growing market share in 2013. An aggressiveinvestment strategy emphasizes capital appreciation as a primary investment objective, rather thanincome or safety of principal. As we see, the company in 2013 wanted to sell more productsproviding additional advertising and promotion (that shown in P;L) increasing may be,customers’ payment terms extension. The strategy resulted in a 4.2% increase in sales, but alsosignificant reduction of RoS and dangerous reduction of liquidity indicator – quick ratio. As a result,AP rose almost twice means that the company started to experience difficulties in paying off theirdebts.Thus, the company strategy during 2013 was risky . But while discovering next 2014 and 2015 years,we could notice that the company managed to solve some problems. We could make a conclusionthat a firm sold goods, but consumers didn’t pay back in terms, which made a process of developingthe company very slow. Company should improve the credit policy.

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