Financial Statement Analysis of Blackmore Company
Introduction
A company’s financial strength is predicted through prediction, comparison and evaluation of its financial information. This is the basis for financial planning, analysis and coming up with valid decisions for the company. This details about the company is acquired from its financial statements or accounting documents that comprise, balance and income sheet and the cash flow statement. The most commonly used financial statements are the balance and income sheet as they give a company’s financial status and ability (Higgins, 2009). The balance sheet offers information regarding a company’s assets, liabilities and owner’s equity on a certain date. While the income sheet offers a summary of the revenue, expenditures and net income of a company. This details offers a company’s level of profitability (Soliman, 2008). The definition for financial analysis is the practice through which a company’s or an organization’s financial ability and flaw is acquired between the items of balance sheet and income statements. This paper looks to focus on the financial analysis of Blackmore Company. The paper will focus on the financial ability and weakness of the company through a look at its balance sheets and other financial documents.
Blackmore is a front runner in the supply and of tools, and plastic trays as well as the horticulture industry. Not long ago, the company improved in plant capacity and went through promotion of its products for them to go national. Taking into consideration the efforts that have been placed in the company, it suffered huge losses in 2008 and concerns rose regarding how it will rise from this. Faisal, the chairman for the company, went through a process of reviving the company to a stronger financial setup (Higgins, 2009). With this in mind, he appointed Hazza as his assistant. As he went through the company’s monthly financial information and made a comparison with the annual details, Hazza found some discrepancies. Gaps were found in how money was used and getting the benefits which were much bigger than what the company’s leadership had expected (Brown, and Whittington, 2007). Hence, they were saw it possible for the company to thrive in a short period of time. This paper goes on to assist the company in analyzing the balance and income sheets and additional information.
Project Focus
As stated, financial analysis is a method of identifying the financial ability and weakness of an organization. There are several ways that a financial analysis can be done. This involves: Ratio Analysis, Time Series, Cross section, industry and Performa Analysis (Nissim, and Penman, 2001). The analysis for Blackmore Company will be made possible through use of varied tools.
As acquired from the balance sheet from Blackmore Company summaries can be acquired:
Blackmore acquires its finances from equity and debts. The capital that has been used for the years 2007, 2008 and 2009 are as shown below:
| CE 2007 | $1,952,352 + 400,000 | $2,352,352 |
| CE 2008 | $ 492,592 + 723,432 | $1,216,024 |
| CE 2009 | $ 663,768 + 323,432 | $987,200 |
Source: The Blackmore Company, 2013
The data above shows clearly that in 2008, Blackmore Company had suffered a huge debt source in comparison to the previous year. This made it hard for the company to acquire profit and hence faced huge loses (The Blackmore Company, 2013). Acquiring the lesser value in the debt source is a good manner that made it possible for the company to stabilize the financial status.
It is necessary for the company to undertake its responsibilities as the time runs out. Liquidity ratios can be applied to estimate the strength of the company in acquiring its goals. The measures of liquidity are acquired through Current Ratio and Quick Ratio (Nissim, and Penman, 2001).
The formula for the Current Ratio is:
CR= Current Assets/Current Liabilities
This helps to measure the solvency for the company in a short time period
While the formula for Quick Ratio is:
QR= Current Assets – Inventories/Current Liabilities
The Inventories are said to be less liquid and call for additional time to acquire the money. The table below shows the liquidity ratios for the company in the period 2007, 2008 and estimate 2009.
| 2009E | 2008 | 2007 | |
| Current Ratio | 2.34 | 1.17 | 2.33 |
| Quick Ratio | 0.84 | 0.39 | 0.85 |
Source: The Blackmore Company, 2013
Blackmore Company Liquidity Ratios
The ratios that have been shown in the table above for the year 2008 have very low values when compared to the previous year. For the period 2009, there is good progress for the company. In 2008, the low current and quick ratio values, and as shown above the debt source being too great, they suffered massive loses (Nissim, and Penman, 2001). Hazza, the assistant chairman for Blackmore Company have the ability to go on with the estimated source and aim to acquire the expected digits on the basis of liquidity.
A company has to have a healthy financial position both in the long and short periods. The long term position for Blackmore Company, and Financial Leverage Ratios are computed below:
| 2009E | 2008 | 2007 | |
| Long term Debt Ratio | 0.17 | 0.59 | 0.33 |
| Debt-Equity Ratio | 0.21 | 1.47 | 0.49 |
| Equity Ratio | 0.83 | 0.41 | 0.67 |
Source: The Blackmore Company, 2013
Blackmore Company Leverage Ratios
Focusing on the debt equity ratio, the approximate values are good for one to acquire a healthy financial status. In 2008, the 1.47 debt equity ratio shows that the creditors have a bigger say when compared to the owners (Nissim, and Penman, 2001). This tends to show that a small portion would be at a threat to be issued to the creditors and the organization when they do not acquire the approximated profits hence high levels of loss would result.
The discussion shown above are static and may not show the capability of Blackmore Company to acquire its main goal. The interest Coverage ratio that is calculated through division of the revenue prior to interest and tax through interest charges, shows the ability of the company in servicing ability.
Blackmore Company interest coverage ratio is: 4.35, -0.96 and 7.03 respectively for the periods 2007, 2008 and 2009 estimate. The income sheet shows that EBIT is negative in 2008. This led to the ratio similarly turning negative meaning that the minimum interest expense could not be acquired by the company for that same period (Nissim, and Penman, 2001; The Blackmore Company, 2013). The value acquired for the period 2007 is good and has led to getting 4.35 times the needed expense and the approximate value for 2009 is similarly good to acquire a healthy financial status. The assistant chairman ought to take keen focus in getting the approximate EBIT for 2009.
Considering that most of the ratios stated above and their analysis show that Blackmore Company operates effectively to acquire the approximate values for the period 2009 to be profitable; the next step should be to evaluate the efficiency that the company organizes and used its assets. These can be computed using Activity or turn over ratios (Nissim, and Penman, 2001). The table below shows Blackmore’s activity ratios:
| 2009E | 2008 | 2007 | |
| Current Assets turnover | 2.63 | 3.13 | 3.05 |
| Net Current Assets turnover | 4.58 | 21.84 | 5.34 |
| Fixed Assets turnover | 8.61 | 6.42 | 9.95 |
| Total assets turnover | 2.01 | 2.1 | 2.34 |
| Net Assets turnover | 2.99 | 4.96 | 3.48 |
Source: The Blackmore Company, 2013
The table shown above for the period 2007 to 2009 portray that the sale of Rs. 2.63 can be acquired from the capital used of Rs. 1 on the current assets for the period 2009. In simple terms, for one to acquire a sale of Rs. 1 in the period 2009, the Blackmore has to use Rs. 0.38 in investment for the current assets and Rs. 0.12 in the fixed assets. However, these ratios by themselves do not show the efficiency of the company as it relies more on liabilities. For instance, the period 2008, since it is seen that the turn over ratios of the assets apart from the fixed assets are great, it is seen that the company underwent huge losses (Nissim, and Penman, 2001). This can be attributed to the company’s remaining investment acquired by debts leading to huge losses with no regard to the high turnover ratios. With the huge optimal debt to equity for the year 2009, the efficiency of the company is good and ought to be kept at that in regard to the projections.
Additionally, Blackmore Company’s ability to earn can be acquired with the assistance of the profitability ratios. This would call for the use of DuPont Analysis in the evaluation process (Soliman, 2008). These profitability ratios can be acquired with the help of the sales or the investments (Higgins, 2009). The table below shows the company’s analysis on the earning ability:
| 2009E | 2008 | 2007 | |
| Net Assets turnover | 2.99 | 4.96 | 3.48 |
| Gross Margin | 0.16 | 0.08 | 0.17 |
| Operating Leverage | 0.42 | -0.26 | 0.34 |
| Return on Net Assets | 0.21 | -0.11 | 0.19 |
| Return on Equity | 0.13 | -0.33 | 0.13 |
Source: The Blackmore Company, 2013
Blackmore Company Earning Power Analysis
Focus on the Gross Profit margin shows that the cost for goods sold has gone up in the period 2008 showing a major influence in the decline of the gross profit.
Additionally, the operating and administrative expenses have gone up and this has led to the negative EBIT. The operating and administrative expenses that have been noticed in 2008 have no ability to create profit so as to sustain a healthy financial status. However, a look at the approximate values, the profits are noted in the consecutive year and were enough with role played by several ratios (Nissim, and Penman, 2001; The Blackmore Company, 2013). Additionally, as noted by Hazza, the company trails in terms of the money spent and acquiring the benefits which were much bigger that what the company had expected (Higgins, 2009). This could lead to several issues as noted initially. The top leadership has to be keen on the current asset turnover as well as the investment. This would help good profit and as noted initially, these numbers would result to an efficient company (Brown, and Whittington, 2007). Hence, they should focus on meeting these values. Similarly, as it has been projected, the debt source can be brought down and huge amounts be directed to investment on the current assets. This would make it possible for them to acquire the benefits an operate Blackmore Company effectively.
Conclusion
As it has been noted in this paper through the analysis of the ratios, it can be noted that company is on a good trend in regard to 2008. The main reasons for the fall in the financial data in 2008 is due to the high financing through debt. This led to a decline in earning and made use of this amount in elevating the plant size and marketing promotions. These take time for the impact to be felt. They are hence included to the expenses with no any fast impact on profits. This could in no way be projected by Blackmore Company leading to huge losses in 2008. The benefits may have begun in the market resulting to good approximations of the sales with no added expenses that result to profits. Hence in the coming periods the company ought to be keener as it invests in expenses while considering the estimates of the earnings acquired in a certain year and expecting the delays in investment and benefits acquired.
As it has discussed in this paper, the company’s financial health has a possibility of being a strong one of it acquires the approximated values for the period 2009. It ought to focus in attaining it while being keen on the issues raised. The management should be keen in getting the estimated values for the future at the same time investing in marketing promotions as they focus on the impact period. Generally, at the closure of the 2009, the company’s financial status would be good.
Recommendations
The effectiveness of this study could be better acquired if the cash flow statement as well as the price of the products sheet were provided. Additionally, Blackmore Company has an extensive platform for its products, it would be effective if the promotions done were stated. This would make it possible for analysis of the impact to the clients. Generally, the financial information given were enough to assess the company’s financial position and the issues arising.
References
Higgins, R.C. (2009). Analysis for financial management (9th ed). New York: McGraw-Hill.
Nissim, D. and S.H. Penman (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6: 109-154.
Rhoda Brown, Mark Whittington, (2007). “Financial statement analysis and accounting policy choice: What history can teach us”. Journal of Applied Accounting Research, 8(3), pp.1 – 47.
Soliman, M.T. (2008). The use of DuPont analysis by market participants. The
Accounting Review, 83: 823–853.
The Blackmore Company (2013). Retrieved on 11th September 11, 2013 from http://www.blackmoreco.com
