Case 9: Horniman Horticulture
Assess the strengths and weaknesses of the company Horniman Horticulture.
Constantly growing firm with increasing revenue (15.5% in 2005), net profit, total assets and high returns on equity (5.1% in 2005) *
Large product offerings, with a recent increase of 40%. Majority of offerings are in high demand *
Management (in regards to Bob Brown) has good ties with employees and customers *
Tax expense hasn’t drastically changed (34-39%)
Stabilized depreciation, only rising 20% from 2002-2005.
Massive liquidity problem, most cash is tied up in inventory and accounts receivable *
Not hitting 8% of total revenue as cash margin
Takes 51 days on average to receive payments from sales *
Cash is held up for 517.3 days in 2005, well above the industry average of 381.2 days *
Inventory takes 2-5 years to mature
Decreased inventory turnover ratio
Aversion to financing with debt
Relaxed collection policy
Unsustainable growth rate
How is the company using its cash?
To buy more inventory and to extend their property by 12-acres, with an expected capital expenditure of $75,000 in 2006. In the past two years Bob Brown has also increased their product range by 40%. *
Bob Brown is moving the product range to more mature plants, as they are in high demand and are selling for premium prices. Therefore a lot of cash is held up in inventory *
With improvements to their credit terms, the Brown’s are now acting as a bank to customers as they are offering longer payment periods. This is leaving cash held up in accounts receivable for an average of 51 days. *
Paying for purchases within the 10 day period to receive a 2% discount, this illustrates that the Browns are making payments five times faster than they are receiving them.
What do you expect the financial position of the...
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