CC Clothing Ltd (CCC) is a publicly listed company that is engaged in the wholesaling and retailing of men’s clothing. Its products cater to the market composed of 14- to 28-year-old males. CCC has been able to generate income during the past three years; however, such income figures have been decreasing year-on-year.
This report presents an evaluation of the company’s financial performance and its position in the industry from 2006 to 2008. The company’s board of directors has called for a meeting to discuss the state of the company operations in terms of profitability, liquidity and financial stability and to come up with specific strategies for a positive reversal of the downward trend of the company’s income.
The contents of this report are based on the analysis of the company’s financial statements for 2006 to 2008, the accuracy of which is assumed to have been secured by the company.
Ratios and Other Indicators
The company’s profitability ratios all consistent reflect its decreasing levels of profitability for the years 2006 to 2008. Its ROA went down from 31.0% in 2006 to only 17.3% in 2008; and its ROE, from 32.2% to 19.5%.
An analysis of the company’s income statements shows that while it has been able to maintain the same level of gross profit margin at 54-56%, its net profit margin has substantially decreased from 9.3% in 2006 to only 4.3% in 2008. The company’s selling and administrative expenses have increased and there was no increase in generated sales to cover up the higher operating costs of the company.
Attractiveness of CCC Shares as Investments
The company’s P/E ratio has increased from 10.4 times in 2006 to 20.5 times to 2008. Given that the industry average is 11.0 times, CCC shares are therefore comparatively expensive in terms of its market price for every dollar earned by the company.
It would seem remarkable that despite the 54%-decrease in the company’s EPS from $0.48 in 2006 to $0.22 in 2008, the drop in the company’s share price is only 10% from $5.00 in 2006 to $4.50 in 2008. However, the dividends given out by CCC during the last three years would explain the relatively high market price of its shares. Despite the decreased net income figures from 2006-2008, CCC has been giving out increasing amounts dividends during the same years, as follows. Indeed, CCC has declared part of its retained earnings as dividends in 2007 and 2008. Thus, the decrease in CCC’s retained earnings from $93,633,000 in 2006 to $23,954,000 in 2008. This also explains why while the industry average for dividend yield is set at 5.7%, the equivalent for CCC for 2007 and 2008 are 12.1% and 16.2%, respectively; similarly, CCC’s dividend payout ratios for the past two years are unusually high at 168% and 338%.
The profitability of CCC’s operations has clearly been decreasing from 2006 to 2008. While the company’s stock price has not yet plummeted due to the attractive prospects provided by the company’s dividends, it is bound to go down unless the company’s operations can stage a turnaround in 2009.
Current and Quick Ratios
CCC’s liquidity levels are low. Its current ratios were below the industry average for the years 2006 and 2008, while its quick ratios were below the industry average from 2006-2008. It is also notable that the company’s current and quick ratios were dangerously low at 1.1:1 and 1.4:1, respectively.
The negative outlook painted by the above ratios is similarly reflected by the trend and horizontal analyses. From 2006 to 2008, the trend analysis shows that CCC’s cash decreased from 100% to 49.6%, its accounts receivable to 77.9% and its inventory to 94.3%. Meanwhile, though CCC’s accounts payable decreased in the trend analysis from 100% in 2006 to 89% in 2008, its other current liabilities almost tripled to 287.4% in 2008. The net decrease in current assets and the net increase in current liabilities led to the drastic fall in the company’s liquidity level. The horizontal analysis, in turn, deliver similar observations regarding the decrease in CCC’s current assets and the increase in its current liabilities from 2006 to 2008.
An analysis of CCC’s credit collection and operations efficiency yield consistently dismal results.
The debtors turnover decreased from 18.3 times in 2006 to only 13.6 times in 2008. This led to longer collection periods for CCC’s receivables from 20 days in 2006 to 27 days in 2008. Needless to say, longer collection periods mean delayed receipt of cash and therefore adversely affect the company’s liquidity level.
CCC’s inventory turnover minimally increased from 3.4 times in 2006 to 3.6 times in 2008. This figure, however, falls below the industry average which is set at 5.2 times. Similarly, the computed inventory turnover periods of CCC were shortened from 107 days in 2006 to 101 days in 2008. These, too, are significantly longer than the industry average, which is 71 days.
The company’s financial stability level has materially deteriorated. Its debt ratio increased from 33.6% in 2006 to 54.9% in 2008. This means that by 2008, the value of the company’s debts was higher than that of the shareholders’ interest. This further means that the company is heavily in debt. While the industry average sets the equity ratio at 60.6%, that of CCC for 2008 was computed at 45.1%. The same shrinking of the shareholders’ interests explains why the ratio of assets to capital has increased from 1.5:1 to 2.2:1.
The company also has not been maximizing the value of its assets by utilizing them for optimum operating results. Compared to the industry average asset turnover of 4.5:1, CCC’s asset turnover rates for 2006-2008 were 2.3:1, 2.5:1 and 2.6:1.
Given the company’s increased debts, corresponding increased interest expenses and its decreased net income, it should not be surprising that while the company earned its interest expenses 69.9 and 331.4 times in 2006 and 2007, the equivalent for 2008 has drastically been reduced to only 16.3 times.
In summary, the company’s profitability, liquidity and financially stability all suffered a big blow in 2008.
The sales have relatively been constant from 2006 to 2008 despite the huge increase in the company’s operating costs. The company’s burgeoning loans also gave rise to much higher interest rates, which all the more caused its net income to decrease year-on-year. Thus, the company’s marketing or sales group would have to beef up by setting higher sales figures as targets and then hitting them. The operations overseers also would have to monitor the company’s expenses. All possible cost-cutting measures would have to be implemented.
Increased profitability and liquidity can be attained if all segments of the company would actively participate in improving the results of the company’s operations. More efficient cash management would mean higher rates of collectability of receivables and shortened collection periods. Better cash management can eventually do away with the need to borrow. Better marketing performance would push operations or production groups to be more efficient – to deliver higher quality, productivity and efficiency in the course of their work.
Given the low asset turnover of the company, there may be a number of asset items that can be disposed of without compromising the company’s operations. The proceeds of the sales of these idle and unnecessary asset items can be used to settle a fraction of the company’s loans. This move and other similar means will gradually improve the company’s financial stability level.
The entire contents of this report have been based purely on the financial statements provided by the company. To more accurately point out the causes of the company’s deteriorating financial performance, however, relevant data regarding the company’s business sector and industry, its competitors, and the general state of the country’s economic and political scenarios would have to be considered, as well.
After all, some market forces may be traceable to external culprits. Decreased sales may be caused by an ongoing economic recession. Increased costs may be due to uncontrollable inflation. These economic forces at hand would definitely take their toll on any company’s operating performance and financial condition. Putting all the blame, then, on the company’s management and workforce would be unfair and futile.
Similarly, industry data would have to be taken into account when evaluating a company. Using up all of a company’s resources to resurrect a dying industry would be sheer waste. Financial data regarding a company’s competitor also would bring light to some issues encountered by the company’s management. It also can generate interest in initiating joint industry moves to address common industry problems. There, indeed, can be common problems that are better tackled as a solid group of companies, rather than individually.
There is always wisdom in learning of the prevailing best practices in the industry that one’s company belongs to. There is wisdom, as well, in taking a look at one’s company from the viewpoint of the world.
List of References
Reilly, F.K. and Brown, K.C. (1997) Investment Analysis and Portfolio Management. New York: The
White, G.I., Sondhi, A.C. and Fried, D. (1998) The Analysis and Use of Financial Statements. New York:
John Wiley & Sons, Inc.
Appendix – Part C
Explanation of some of the major shortcomings/disadvantages of basing real world financial decisions solely on the basis of financial statement analysis.
Not simply a list but an explanation required here please.
This section does is not required to relate specifically to CCC Ltd. 500 words maximum.
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Fleet W, Summers J & Smith B. 2006. Communication skills handbook for accounting, 2nd edition. John Wiley & Sons Ltd, Brisbane.
Use Harvard system for all referencing
Include in-text referencing of all sources used
Only include references which have been referenced in-text
You are expected to have referred to at least three references including the text, another text book and either a business journal or internet site.
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Appendices. These are part A of the assignment. For part B/C students don’t attach the percentage and ratio analysis from part A as this will only increase printing costs. Students may attach appendices on interest rates or other relevant information that they refer to in the body of the report.
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Make sure you have deleted all instructions with “Highlight and delete this message”, including this one and then update the contents page numbers before saving the final version of your assignment.