Case 9: Horniman Horticulture
Case Study 2: Financial Analysis and Forecasting
1. Strengths:
- Profitability Ratios: Constant growth from 2002-05, particularly year 2004 and 2005 with impressive growth in revenue with12.5% and 15.5% respectively, much higher than the benchmark just -1.8%. Gross, operating and net profit margin were all performing better than the benchmarks.
- Management: Co-owner Bob Brown has been brought up to value a strong work ethic, which he has obtained through his father since at young age by working for his father at the mill. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was highly respected. Bob was a “people person”, his warm personality made beloved by all customers and employees.
Weaknesses:
- Activity Ratios: takes increasingly time to receive payments from sales - 51 days year 2005 (far exceeded the benchmark – 22 days). Days of inventory on hand (476 days) has been increased gradually much higher than the benchmark (386 days). Payables turnover (10 days) is too short compared with the benchmark (27 days) and slowly declined as years pass by.
- Liquidity problems seen through cash on hand kept decreasing since 2002 and sharply reduced in 2005 probably resulted from the issue that quick payables and slow receivables happened simultaneously every year. Since 2005, they had not reach their target balance of 8% cash over total revenue (fell to 0.9% - 2005)
2. Free cash flow to the owners of the firm (FCFE) for 2005:
FCFE = Operating Cash Flow – Change in Net Working Capital – Change in Investments
|Operating profit | |100.0 |
| − Taxes | |39.2 |
| + Depreciation | |40.9 |
|Operating cash flow |101.7 |
| − Capital
1. Strengths:
- Profitability Ratios: Constant growth from 2002-05, particularly year 2004 and 2005 with impressive growth in revenue with12.5% and 15.5% respectively, much higher than the benchmark just -1.8%. Gross, operating and net profit margin were all performing better than the benchmarks.
- Management: Co-owner Bob Brown has been brought up to value a strong work ethic, which he has obtained through his father since at young age by working for his father at the mill. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was highly respected. Bob was a “people person”, his warm personality made beloved by all customers and employees.
Weaknesses:
- Activity Ratios: takes increasingly time to receive payments from sales - 51 days year 2005 (far exceeded the benchmark – 22 days). Days of inventory on hand (476 days) has been increased gradually much higher than the benchmark (386 days). Payables turnover (10 days) is too short compared with the benchmark (27 days) and slowly declined as years pass by.
- Liquidity problems seen through cash on hand kept decreasing since 2002 and sharply reduced in 2005 probably resulted from the issue that quick payables and slow receivables happened simultaneously every year. Since 2005, they had not reach their target balance of 8% cash over total revenue (fell to 0.9% - 2005)
2. Free cash flow to the owners of the firm (FCFE) for 2005:
FCFE = Operating Cash Flow – Change in Net Working Capital – Change in Investments
|Operating profit | |100.0 |
| − Taxes | |39.2 |
| + Depreciation | |40.9 |
|Operating cash flow |101.7 |
| − Capital