Delisle Industries - Analysis of financial condition and Recommendation for Company’s Operation problems and proposed expansion

Case 1: Delisle Industries

Memorandum

To: Micheline Rousseau

From: Jolly Jeffers, CMC

Subject: Analysis of financial condition and Recommendation for Company’s Operation problems and proposed expansion

Analyse Financial Position

Liquidity

The company’s liquidity position is not good in comparison to the industry average but when we check it against the ideal position which says that the liquidity ratio should be between 1 to 2 times then the company is in a good position. but the cash ratio is very low it's only 0.05 times which means that the company’s most current assets are occupied by stock and account receivables. (Mueller, 2019). However, since both the current ratio and cash ratio are lower than the industry average hence company needs to work towards its liquidity position. An important point to note here is that both current ratio and cash ratio of the company is deteriorating year by year and it has dropped to level of 0.05 and 1.51 in 2010.

Asset Management

The company’s stock turnover ratio is only 86 days (taking Raw material, WIP, and Finished goods turnover together) while the industry ratio is 140 days so the company is in pretty good condition. The Average Collection period and average payable period both are higher than the industry average which is not good as we don’t get cash from debtors on time so we are not able to make payable to creditors within due time. Though Company’s cash conversion cycle and total assets turnover ratio are good in comparison to industry norms Fixed assets turnover ratio is lower, which means the company’s fixed assets are still not able to generate proper turnover to pay back their cost. (Kenton, 2020). However, total asset turnover ratio for the company is higher than industry average but the same is showing dropping trend year on year.

Long-term Debt Paying Ability

The company’s debts are increasing year on year and currently, the company is working with 76% leverage which means that for finance, the company is highly dependent on external funds and the Fixed charges coverage ratio is 2.84 times which means the company can earn profit only up to making payment of interest by 2.84 times. Though it's higher than the industry ratio i.e. 2.06 times it’s very low. (Anon., n.d.). Hence company need to relook as the same higher than twice the industry average prevailing in the sector.

Profitability

Every ratio showing profitability for the company is lower than the industry average which means the company needs to look into this seriously, as without profit no business can survive for long. Gross profit margin of the industry is 42% however for the company it is 26% , operating profit for industry average is 16% and for the company it is 3.76% , Net profit Margin for the industry is 9% however for the company same is 0.35% , ROA is 4% against industry average of 6% and ROE is 2.24% against industry average of 15% . Hence the company position is really weak. Any company survival depends on the overall profitability of the company. Hence company need to relook at its either revenue line items or cost line items or processes etc to ensure higher rate of profit.

Recommendations

1. Control over Operating Expenses: Company’s gross profit margin is 25.89 % while the Operating profit is only 3.76% which shows that company’s spending a huge amount on operating expenses so the company needs to implement some checks and control for rationalization of unnecessary expenses especially R&D Expenses. Further for having a control on the opex company need to relook at the best practices and ensuring the same is implemented and digitally followed for ensuring the cost reduction and increasing the profits for the organisation

2. Efficient use of idle resources: Company is facing challenges for storage space while on the other hand owner’s father’s business building and equipment are left idle. The owner can explore the option of using the building as storage for her business and check if equipment can also be utilized in her business. Hence company need to relook at all the options for every line item take initiatives and keep a track record of finding the small and big areas of cost savings and following the same and leaving no stone unturned for cost reduction.

3. Explore vendor for Distribution of Products: Company is highly dependent on Costco but since its agreement was only for 5 years so the company should explore a new vendor. Dependency on only one vendor is never good for any organization there should always be back up of the vendor. Further there is possibility of rate negotiation only in case company has list of suppliers dealing in with. One of the reasons that company is having low profitability can also be that it is dealing with only one supplier and hence is dependant on them and is not able to negotiate on rates with the vendor. Resultantly higher cost to the vendor and lower profits for the company.

4. Change in Product Mix: Since Rain Barrels and Plant, Holders are less profitable so the company needs to go for product mix change also.One of the key factor that any company should always focus is which of the company’s products are profitable and which ones are less profitable. The focus of the company should always be on increasing the production and sale of high profit products as this will only help in improvement on the overall profitability of the company. Hence in the current case of the company it is clearly visible that the products like Raine Barrels and plant holders are less profitable hence company should spend its time and sources lesser on production and sale of these products and should focus on increasing the same of other products which has higher profit margin.Hence this will help the company to increase the overall profitability. So company’s management should relook at the prevailing product mix of the organization.This will result in increase in overall net profit margin of the company which is currently hoovering around at just 0.35% and is showing dropping trend as well year on year.

Exhibit-1 Ratio table

Particulars	Delisle Industries					Industry Average
	2006	2007	2008	2009	2010
Liquidity
Current Ratio	2.41	2.01	1.73	1.59	1.51	3.17X
Cash Ratio	0.19	0.17	0.13	0.07	0.05	0.16X
Asset Management
Parts Inventory Turnover in Days	23.62	21.66	23.06	21.01	22.32	33.86 days
Work-In-Progress Turnover in Days	30.58	28.28	25.13	20.07	17.14	9.69 days
Finished Goods Turnover in Days	28.06	32.86	33.69	37.85	46.50	96.54 days
A/R Turnover in Days	59.79	60.63	59.75	62.05	58.95	30.44 days
A/P Turnover in Days	61.58	78.71	83.74	85.09	88.74	59.47 days
Cash Conversion Cycle	80.48	64.72	57.90	55.89	56.17	111.06 days
Fixed Assets Turnover	2.61	2.88	2.10	1.95	1.86	2.19X
Total Asset Turnover	1.37	1.42	1.21	1.17	1.13	1.00X
Long-term Debt-Paying Ability
LT Debt to Total Capitalization	0.45	0.47	0.62	0.70	0.76	0.32X
Fixed Charge Coverage	9.97	9.12	4.83	3.38	2.84	2.06X
Profitability
Gross Margin	30.51%	28.84%	28.12%	27.28%	25.89%	42%
Operating Profit Margin	11.06%	10.22%	6.90%	4.42%	3.76%	16%
Net Profit Margin	6.22%	5.67%	2.92%	1.04%	0.35%	9%
ROA	10.56%	10.16%	6.44%	4.52%	4.04%	6%
ROE	19.42%	20.32%	12.18%	5.49%	2.24%	15%

Working Notes

1. All ratios are calculated based on year-end totals only, no averages are used.

2. Accounts Payable turnover ratio is calculated using the cost of goods sold since the calculation of purchase value is not possible with given information.

References