The November 2018 Management Case Study is based upon Grapple, a soft drinks manufacturer. Over the course of this short article, VIVA Financial Tuition presents some of the main findings from Grapple's financial statements.
Grapple's statement of profit or loss shows a company that has enjoyed excellent growth in 2018. This is especially impressive considering both the fact that this is a very mature market and also, Grapple's rivals' financial performance (according to page 4 of the pre-seen) lags way behind Grapple's. Revenue is up 61% in 2018, while net profit has increased by a whopping 114%. Grapple obviously has a good handle on its costs. Considering they are renowned for the quality of their ingredients and also considering the fact they compensate their staff well, this big jump in profitability is to be applauded.
The statement of financial position shows up a few causes for slight concern. Grapple needs to take care that it invests well for future growth. Non-current assets have fallen 2% in 2018. If Grapple is to hold its own amongst bigger rivals such as Party Pops and Carnival, it will need to invest well in automated production facilities in future, for example. Luckily, there are a number of options should the company need to fund some big investments. Gearing is still quite low at 17.5% so they could take on more in the way of loans for any investment. The current dividend payment is 66% of net profits so Grapple could cut that for a few years to invest instead. This cut in dividends should be a lot easier to explain to the current shareholders (all members of the Grapple family), than it would be to explain to big institutional investors for example.
The cash flow statement shows that cash rose ever so slightly in 2018 to Z$2.1 million from Z$1.6 million in 2017. Having said that, Grapple is worse off in 2018 from a liquidity perspective than it was in 2017, with the current ratio falling from 3.8 to 2.6. That is largely due to a big jump in payable days from 65 days in 2017 to 98 days in 2018. Grapple is exercising power over its suppliers by lagging amounts owed to them. Nevertheless, there are no real concerns from a liquidity point of view. Another notable feature of the cash flow statement is that depreciation is running ahead of the purchases of non-current assets, indicating that Grapple is perhaps not investing sufficiently in its asset base. This approach will eventually hurt the company's growth prospects.
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