Haefren Baum Essay Example

the total asset turnover ratio. Between the three-year time period, total asset turnover decreased from 2. 096 to 1. 96.

This decline in asset turnover tells me that the company is not efficient in the use of their assets. Similarly, fixed asset turnover has also been on the decline, falling from 9. 108 to 7. 012. The significant decline in fixed asset turnover could be attributed to the declining sales figures, but overall further exemplifies the company’s lack of efficiency. Continuing to evaluate the operations of the company, the company is having trouble collecting payments, with an average collection period ranging between 53 and 78 days.

Because the company’s sales are 25% installment plans, Haefren Baum seems to be offering extremely loose credit terms, which would explain the increase in average collection period. Days inventory held is also on the increase, which shows that it takes too much time for the company to turn inventory into profit. One hundred thirty days is unacceptable in business. However, it should be noted that for a high quality home furnishing retailer a high inventory days might be quite normal. Financial Analysis:

The financial aspects of a business can make or break a company. In the case of Haefren Baum, the company does not seem to be excelling financial. The company is funding itself through long-term debt and the deferment of payable and expense accounts. Funding from the bank can be seen as the liability account Notes Payable (Bank) increases. The company may be forced to fund itself through the bank because of liquidity issues and the fact that its payments from customers are taking a

long period of time, as seen in the average collection period.

Factors that may be driving their funding needs include the expansion of the company to include three outlet stores, and the high Cost of Goods Sold despite declining sales. Overall, I would not rate the company’s cash flows as healthy. The conclusion of an unhealthy cash flow can be seem in the negative net income of 1994 through 1995, and negative net cash amounts. With negative operating and investing activities, financing seems to be the only activities keeping the company afloat, even though increased funding and liabilities from the bank is not healthy for the company.

Improving the operating cash flows will strengthen the company overall because the operating portion is the most important part of a business operation. Negative operating cash flows of 152 and 103 show that the company day-to-day operations are not being profitable. The liquidity of the company seems to be stable, looking at the current and quick ratio. Although the current ratio is useful, the quick ratio is best when determining the liquidity of a company because inventory is removed. Between 1993 and 1995, Haefren Baum’s liquidity is increasing; however, it is still low.

Leverage ratios on the other hand are showing a jump in the company’s debt to equity ratio. It is very noticeable that the company is dependent on accumulating overall debt. Times interest earned for the company has shown the greatest decrease, from 4. 13 in 1993 to 0. 86 in 1995. When it comes to times interest earned, the higher the ratio the better. Haefren Baum is lacking in this area showing

that interest payments can barely be covered, which may be a result of negative operating cash flows. Overall, the company is not profitable in my opinion. All of the profitability ratios can be used as evidence to support this claim.

The main ratio, net profit margin, clearly shows how the profits of the company are deteriorating. By 1995, Haefren Baum was not making a profit at all, which is showing by a net profit margin of -0. 42%. Another measure to determine profitability is the return on equity ratio. Between 1993 and 1994, the return to equity ratio decreased from 1. 01 to -0. 06, which further exemplifies the loss of profits within the company. Summary: The partnership between Haefren Baum and Wiegandt is not profitable. To begin, it has been shown that increased competition has drove down demand, which in turn has decreased sales.

Overall operating activities are not profitable, which in large part because there is no net income driving the figures. In addition, the company does not consider decreasing sales because COGS remained high and slightly increased. Financially the company is not good because most of its funding is through increased liabilities with the bank. Funding issues are quite possibly created because of the lenient credit terms the company has with its customers. Overall, the profitability of the company is negative and measures need to be taken to correct this issue, or the company might want to consider closing down its operations.