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Starting with the Statement of Profit or Loss and it's surprising that in such a thriving national industry that Mavis Venderby's revenues are essentially flat for the year. One wonders whether the growing importance of polystyrene hives has helped other beehive retailers steal market share from MV. The almost 20% rise in other operating costs is very concerning and will obliterate profitability if they continue to rise at such a rate. Marketing, distribution and administrative costs would be included here and given the fact that MV does not seem to be attracting commercial beekeepers, I question the value that such a big increase in expenses represents for the company. It would have been worthwhile ramping up marketing costs if it lead to more commercial customers and increasing revenues but that has not been the case. Commercial beekeepers represent 50% of MV's sales whereas they represented 60% of sales five years ago. What saves MV in 2016 is the one-time profit registered from the disposal of property, plant and equipment which inflates the P&L by T$864,000 in 2016. This relates to the sale of their old premises and equipment as they moved to new and improved premises recently. This gain ensures that MV's operating profit and net profit show increases of 10.7% and 11.3% respectively compared to 2015. Interestingly, without the gain on this one-time disposal, the net profit would have been T$1,535,000 instead of T$2,201,000 - this would have meant a decline in net profit of 22%.
When we turn our attention to the Statement of Financial Position we see the impact of the move to the new premises with property, plant and equipment increasing 54% over the year. This move should give MV the ability to ramp up their operations and generate higher future revenues. Inventory is a big problem for MV...probably the biggest problem they have. This is a company with constant production but seasonal sales which will inevitably lead to a build-up of inventories. Furthermore, MV buys wood in bulk from its suppliers to avail of discounts and the very first step of their production process involves drying that wood for 4-6 months! It's no wonder inventory days ([inventory/cost of sales] x 365 days) have risen from 97 days to 119 days in a year. The 54% decline in cash is another concern. We review the reason for that decline in the next paragraph. The liquidity ratio ([current assets-inventory]:current liabilities) now stands at just 0.6 meaning MV is unable to meet its immediate obligations with its liquid assets. While MV has taken on new debt in 2016, there is no problem with that as their gearing (long-term debt/long-term debt + equity) stands at just 11%.
Finally, we come to the Statement of Cash Flows. Here we get to the root of the problem with the big decline in cash reserves in 2016. Firstly, we see that changes to working capital over the last year have had a significant impact on the cash position. In particular, we note that the 24% increase in what was already a high inventory figure has tied cash up. The second big reason for the decline in the cash position is due to the investment in the new premises which seems to have been partially financed with the T$1.5m loan and partially funded with cash. The move to the new premises positions MV to take advantage of the favourable market conditions in Tucland for the beekeeping industry. Furthermore, the move to the new premises has been financed in a responsible and sustainable way with a mix of cash and a debt that MV is easily able to service (their interest coverage is 61.6).
In conclusion, MV seems to be on a sustainable financial footing and the move to larger premises should allow them to get revenues growing again. Their main concern is certainly their high inventory levels. They need to manage inventories much more effectively.
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