Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

Case 2 Paper: Anandam Manufacturing Company

Point of View
Case solution is assumed from the perspective of the Bank, Anandam Manufacturing Company’s
prospective financier.

Case Content
Anandam Manufacturing Company started out as a small business but as more people recognized
their work, orders went through the roof. In 3 years’, they had an increase in revenue from 2 million
rupees to 8 million rupees and increase in profit after taxes from 0.364 million rupees to 0.84 million
rupees. However, amidst the successes came the problems. The company has been facing financial
liquidity and funding problems as it could not keep up with its own rapid growth. Their growth may be
attributed to the continuous and exponential growth of India’s Textile Industry. Manifestations of said
problems were excessive credit terms, insufficient funds for new machines and a larger factory space, and
inadequate working capital for the day-to-day raw material purchases. Agarwal, the owner of the
company, believes that because his business is growing, he needs about 50 million rupees to fund the
much-needed expansion and to continue smooth operations.

Problem Definition
Given the financial statements of Anandam Manufacturing Company, the bank has yet to decide
on the approval of the loan proposal. In order to make the final decision, the loan inspector not only has
to determine the company’s liquidity, coverage, profitability, efficiency, and leverage ratios. They also
have to assess the overall performance of the business and compare it to its industry. Furthermore, the
loan inspector has to analyze the Indian Garment Manufacturing Industry as a whole and spot
opportunities in this industry. By doing so, the bank will be equipped with the knowledge to make a good
assumption of the company’s financial capabilities and capacity of its long-term performance.

Analytical Framework/Methodology
To come up with the case analysis, an overview of the industry and the business must be done.
First, the context, financial situation, business situation, PEST Analysis, and opportunities and threats of
the Anandam Manufacturing Company and its industry will be studied. Context must be analyzed because
it contains information regarding the base goal of the company. Next, is to look at their financial situation
because this explains the process of how they ensured financial obligations to fund the business. This
eventually leads to looking at their business situation which illustrates both the initial and recent
outcomes as they operate in the Indian Garment Industry. From analyzing the manufacturing unit, the
industry as a whole is viewed through a PEST analysis. This is one crucial step in the methodology as it
considers the external factors that affected the industry in sum.
After analyzing the overview of the industry and the business, the financial capabilities of the
company will be examined. All data in this analysis will be derived from the financial ratios. First, a
horizontal analysis of the company’s financial ratios will be done to assess whether the growth rate of
these ratios are positive or negative indicators in a business’ performance and capabilities. Afterwards,
the financial ratios will again be used and compared to the industry average of these ratios. This will be
used to evaluate if the company is doing well relative to its industry. The average of the ratios were used
since it can serve as a basis for the company’s long-term performance. Afterwards, the decision whether
to invest in Anandam Manufacturing Company will be done and it will be based on the overview of the
industry, business, and its financial capabilities and capacities.
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

Case Analysis
I. Overview of the Industry and Anandam Manufacturing Company

Context. The Anandam Manufacturing Company was established in 2012. It was a small
manufacturing unit specialized in quality formal party garments for girls up to 12 years of age. With only
1.2 million rupees, the business started its operation at Anand Agarwal’s residence, which became a small
factory with machines installed, as well as the resources and raw materials needed. The manufacturing
unit had increased orders which raised demands for the dresses and this pushed greater operations in the
business.

Financial Situation. As the business grew, financial liquidity and financial problems surfaced. They
needed to maintain purchases of raw materials but there was a shortage in storage and in their funds due
to the purchase of a new equipment in the early years and long credit periods granted to customers. In
2012, they borrowed 0.736 million rupees to meet their short-term and long-term requirements.
However, the operation perpetuated and eventually they had to borrow more money from the bank. In
2013 and 2014, they loaned 1.236 million rupees and 2.5 million rupees, respectively.

Business Situation. In the early years, the company had difficulty in the procurement of their
heightening mortgage loan. Thus, they had to provide collateral security to cover this. But in the
operations aspect, they were garnering positive cash flows which helped them cover for the loan interests.
In retrospect, the business was profitable based from the increasing net sales despite the expenses and
interest payments. However, the latter years show that receivables were not collected on time and stocks
are piling up because of delays in delivery. Machines were also getting old and outdated and additional
laborers were being required.

PEST Analysis.
POLITICAL ECONOMICAL SOCIO-CULTURAL TECHNOLOGICAL

Indian government Increases in per capita A shift among the New machinery was
provided a 5-year plan income and youth towards more efficient and
training for around 2.7 demographic branded products and modern, however,
million people in their distribution led to changes in the lifestyle acquiring these were
integrated skill growth in retail. of the general difficult as companies
development scheme. population. were reluctant
because of the costs it
entails.

Opportunities and Threats. Forward increase in consumerism and disposable income was causing
the retail sector to undergo rapid growth as product quality became more superior. Many national and
international players were entering the Indian textile market. Because of this, more than 13 per cent
annual growth is expected in the apparel segment for the next 10-year period (from 2012). However, the
industry is still challenged by ambiguous and obsolete laws, lack of economies of scale, and a shortage of
skilled employees.

II. Analyzation of Financial Ratios (see appendix for financial ratios)

After data was gathered through Anandam’s financial statement accounts, the financial ratios of
the company were computed and compared to the company’s growth and industry’s average ratios.
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

Results of each method of analysis conveyed overall negative indicators of Anandam’s financial
capabilities and operations.
The growth rate of these financial ratios in comparison to the first year of operations mostly
showed negative results and bad indicators of liquidity, leverage, coverage, efficiency, and profitability.
For example, the growing Days Inventory of Anandam Manufacturing Company implies that it is taking
longer for the company to sell its products. Based on our calculations, from an average day’s inventory
value of 92 back in 2012, it increased to approximately 168 in 2014 which shows a growth rate of 81.65%.
This tells us that the company may not be able to sell a lot of products within the year which may be a
future indicator of low sales. Furthermore, the company’s debt-to-equity ratio increased by almost 114%
(from 0.63 in 2012 to 1.36 in 2014) which implies a lot of risks given that creditors have currently a larger
claim to its assets. In essence, the growth rate of these financial ratios shows us that the company has not
been doing relatively well than what they were presenting. Sales may be increasing but other factors
weigh in which drives the performance of the company down. For further analysis of the implications of
the growth rate of the current financial ratios in comparison to the first year, kindly refer to the appendix
A.
On average, most, except for Gross Profit Ratio and Return on Assets, showed that Anandam
Manufacturing Company is not able to keep up in the industry based on their liquidity, leverage, coverage,
efficiency, and profitability in comparison to other manufacturing companies in this industry. For example,
the average current ratio of the company may indicate that they have twice the amount of current assets
to cover their current liabilities. However, one glance at their industry averages shows us that, in fact,
most companies in this industry have current ratios of 2.5 which is higher than Anandam’s Manufacturing
Company’s Current Ratio. The comparison of the financial ratios of the company to its industry shows us
how well the company is doing relative to other manufacturing companies. For further analysis of the
implications of the financial ratios of the company in comparison to the industry, kindly refer to the
appendix A.
The financial ratios of Anandam’s Manufacturing Company give us a much clearer understanding
of the company’s operations and ability to manage their finances to cover for their obligations and
expenses. Based on these financial ratios, it is sufficient to say that they do not have the financial
capabilities to take in more loans as of the moment.

Conclusion/Decision
Despite the growing sales of Anandam Manufacturing Company and India’s manufacturing
industry, the bank must not approve the loan due to the negative indicators found in the company’s
financial ratios in comparison to its personal growth as a company and its performance within the
industry.

Justification and Implementation

The bank must not approve the loan because it is more unlikely for Anandam Manufacturing
Company to keep up with short-term obligations. For one, they kept borrowing bank loans during their
early years of operation, which then accumulated into higher loan mortgages in the following years. Assets
such as equipment and machinery are now outdated and the value has depreciated, which diminishes
their ability to cover obligations. Long credit periods granted to customers also means less cash on hand
and longer receivable days, leaving an understated Cash account. Because of inventory stocks piling up,
inventory is not replenished immediately due to lack of storage which elongates the inventory days,
posing a potential low demand and low sales of the products.
Hence, as a final approach to execute and operationalize the decision, the bank must inform the
loan applicant of the rejection of his proposal, given the high risks of noncompliance to payment.
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

References
● Corporate Catalyst. (2015, July 2). A Brief Report on Textile Industry in India. Retrieved from
www.cci.in/pdfs/surveys-reports/textile-industry-in-india.pdf
● India Brand Equity Foundation. (2015, August 15). Textiles and Apparel. Retrieved from
www.ibef.org/download/Textiles-and-Apparel-August-2015.pdf
● Mezzandri, A., & Srivastava, R. (2015, October). Labour Regimes in the Indian Garment Sector.
Retrieved from www.soas.ac.uk/cdpr/publications/reports/file106927.pdf
● Planning Commission. (2014, November 5). About Us: Planning Commission, Government of India.
Retrieved from
http://planningcommission.nic.in/aboutus/history/index.php?about=aboutbdy.htm
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

Appendix

● Appendix A: Financial Ratio Comparison Analysis

Ratio Anandam Manufacturing Company IN Anandam Manufacturing Company
COMPARISON to Textile Industry Financial Ratio’s Growth Rate
Average

Current Less likely to be able to pay for their Less likely to be able to pay for their short-
short-term obligations term obligations

Acid Test Less likely to be able to pay for their Less likely to be able to pay for their short-
short-term obligations using their term obligations using their current assets
current assets

Receivable Less effective in collecting receivables Less effective in collecting receivables and
Turnover and extending credit extending credit

Receivable Takes more days to collect receivables Takes more days to collect receivables
Days

Inventory Does not replenish inventory as fast Does not replenish inventory as fast
Turnover

Inventory Inventory stays with them longer (more Inventory stays with them longer (more
Days days) before being sold days) before being sold

LT-Debt to More likely to be able to pay off LT debt More likely to be able to pay off LT debt with
Total Debt with assets assets

Debt-to- Less likely to be able to generate cash to Less likely to be able to generate cash to
Equity satisfy its debt obligations satisfy its debt obligations

Gross Manages cost of sales better than Manages cost of sales better than others and
Profit Ratio others and therefore shows that they therefore shows that they are able to cover
are able to cover more costs more costs

Net Profit Profit per 1 Indian Rupee of sales is Profit per 1 Indian Rupee of sales is lower
Ratio lower

Return on Less profit from each Indian Rupee of Less profit from each Indian Rupee of
Equity common stock equity generates common stock equity generates

Return on Generates profit from total assets more Generates profit from total assets more
Total
Assets

Total Asset Less efficient in using its assets to More efficient in using its assets to generate
Turnover generate revenue revenue
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

Fixed Asset Less efficient in using its fixed assets to More efficient in using its fixed assets to
Turnover generate revenue generate revenue

Current Less efficient in using its current assets Less efficient in using its current assets to
Asset to generate revenue generate revenue
Turnover

Interest Less likely to be capable of paying off Less efficient in using its current assets to
Coverage interest expense generate revenue

Working Less efficient in utilizing working capital Less efficient in utilizing working capital to
Capital to support sales support sales
Turnover

Return on Does not generate profit from fixed Does not generate profit from fixed assets as
Fixed assets as much much
Assets
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

● Financial Ratios
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

● Averaged Financial Ratios in Comparison with the Industry Average of the Key Ratios

● Analysis of the growth rate of the company’s ratios from its first year in comparison with the
latest year
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

● Balance Sheet

● Income Statement
Group 4: Hernandez, Kawada, Laya, Querijero, Tan, Trinidad

● Other Valuable Accounts