Financial Analysis of a Supplier Company A

General Information
Company Name: Company A
Company Address: 7899 Northwest Expressway, Suite 890, Knoxville, Tennessee, 37901
Legal form: Limited Liability Company with a Board of Directors
Capital Stock: $59,000
Activity Type: Dataware
Date of Founding: 06/17/1999

Management Team
Chairman of the Board: John Taylor
CEO: John Taylor
Deputy CEO: Patricia Henderson
Director: Patricia Henderson
Director: Thomas Jackson
Director: Christopher Scallion

Analysis Report
Summary Analysis
Operations
Liquid Assets
Debt

Analysis based on Company As year-end

financial statements from 2004 to 2006
As of November 10, 2009
Company A Analysis Completed on 11-10-2009

You are considering choosing Company A (the Company) as a supplier for your business. The potential volume for
your business amounts to $170,000.
Summary Analysis
The Companys revenue has been decreasing over the last three years, and it has not been able to maintain
its profitability. However, there is still a bit of room to manoeuver. The Company will have to watch out for
further revenue reduction or will continue to weaken. This financial situation is therefore favorable for
your negotiations, but you must be mindful of how long it will last if you consider this relationship to be
strategic for your business.
The average time to collect accounts receivable is very long (141 days). This is above the industry average of
58 days. We suggest that you investigate this point further.
The Companys production is entirely financed by working capital. This allows for obtaining liquid assets,
which is typical for the industry.
Cursory analysis of the Companys financial situation reveals a significant risk of insolvability over the next
24 months.
Given these points, conducting an in-depth analysis is absolutely mandatory before making any final
decisions.
Without taking into account the global revenue that your deal represents for Company A, the amount ($170,000) of
the transaction you are considering represents 7.5% of the Companys revenue. Your potential to negotiate for less
is high. However, be careful not to surpass 20% of its turnover in any accounting period. Otherwise, Company A may
become dependent on your business, and this could potentially generate risks for you (compensation, requirement
to hire their people, etc.) should you decide to terminate your relationship with them.
Operations
Revenue
2004

Industry

2005

Industry

2006

Revenue (K)

3,000

2,560

1,860

International Revenue (K)

% International Market

% Revenue Change

Industry

3.80

-14.67

6.10

-27.24

10.50

20%

3000
10%

2500
K

2000
International Revenue

1500

Revenue in France

1000
500

Company

0%
2005
-10%

2006
Average of
Industry

-20%

0
2004

2005

2006

Company A Analysis Completed on 11-10-2009

-30%

The revenue has continued to decrease considerably (by 27.3%, or $900,000) last year, and this at an accelerating
rate. This worrisome trend is worse than that typically seen in the sector. In fact, in the sector, the revenue has
increased on average by 10.5% from 2006. An in-depth analysis will therefore be required in order to determine
whether the Companys decline is due to economic fluctuations or structural difficulties and if the situation can be
reversed. Let us first see how this decline has had an impact on profitability.
Profitability
2004
Gross Operational Margin Surplus
(K)

495

Margin (%)

16.50

Industry

2005

Industry

2006

307
12

Industry

688

12

15

37

13.80

40,00%
35,00%
30,00%
25,00%
Company

20,00%

Margin of Industry

15,00%
10,00%
5,00%
0,00%
2004

2005

2006

.
Company As gross margin has improved considerably over the last accounting period but in an irregular fashion.
Over the last accounting period, this improvement should be compared to the general deterioration seen in the
sector (8%).
Operational Break-Even
Days

Industry

2005

Industry

2006

Industry

Day Sales Outstanding (DSO)

200
4
109

71

91

72

141

58

Credit Days Outstanding (CDO)

123

68

130

61

72

61

Inventory Turnover

The Day Sales Outstanding (DSO) shows the average length in days of the payment timeframe allowed by the
Company to its clients. This delay is in clear progression (up 54.9%) over the last accounting period. Over this period,
the increase observed is to be compared with the sectors decrease (19.4%). The delay is, over the last accounting
period, clearly higher than the industry average. The increase in this ratio reflects a negative impact by increasing
the need for available cash. This trend is of course favorable for you in your negotiations. However, it is necessary to
question the supplier on its activity during the three months preceding the year-end financial statements in order to
establish whether the gap with the sector corresponds to an increase in its activity over the same period.

Company A Analysis Completed on 11-10-2009

160
140
120

DSO

100

CDO
Inventory Turnover

80

Industry DSO

60

Industry CDO

40

Industry Inventory Turnover

20
0

Company A is a service-oriented business and thus carries no significant inventory.

An analysis of the Credit Days Outstanding (CDO) shows the payment timeframe authorized to the Company by its
suppliers. This delay has decreased (up 44.6%) in an irregular fashion over the last accounting period as well as
between the beginning and the end of that period. Over the last period, the decrease observed is to be compared to
the industrys stagnation. However, the delay is consistent with the industry average, in absolute value over the last
fiscal year. Its decrease has had a negative impact on the available cash. It can be a sign of a hardening of payment
conditions granted by the suppliers (which is not a sign of confidence toward the business solvability) but also a
change to suppliers having stricter payment conditions.

Liquid Assets
Liquid Assets
Days of Revenue

2004

Industry

2005

Industry

2006

Industry

Cash Available

-80

32

-93

60

24

65

Cash Requirement

-76

-11

-1

-2

Cash Available

-4

23

19

50

19

63

Available cash in days compared to the revenue reflects the margin of financial security set up by the Company to
meet its expenditures. The working capital requirement shows the number of required assets for running the
business. It is important to recall that our reasoning is based on values established at the balance sheets closing
date. In the case where its activity is seasonal by nature, the Company will often lean towards choosing the balance
sheet date when its level of available cash is lowest. Its usually assumed, in order to take into account the
fluctuations of the cash requirements over the course of the accounting period, that a level of available cash which
represents 30 days of revenue ensures a certain level of financial security.
The available cash in days of turnover of the Company is improving over the accounting period. Over the last period,
the increase observed is greater than that of the sector (up 8.3%). That fluctuation is due primarily to that of
financial debts. However, over the last period, the rate is inferior to that of the industry average. Available cash in
terms of days of revenue or turnover has considerably increased over the last accounting period as well as between
the beginning and the end of that period, but in an irregular fashion. Over the period, the deterioration observed is
to be compared to the sectors improvement (100%). That change is mainly related to the accounts receivables and
other debt. However, the ratio has remained close to that observed in the industry (between -21 days and 13 days)
in absolute value over the last accounting period.

Company A Analysis Completed on 11-10-2009

80
60
40
Cash Avalaible

20

Cash Needed

0
-20

2004

2005

Cash Avalaible

2006

Industry Cash Avalaible

-40

Industry Cash Needed

-60

Industry Cash Avalaible

-80
-100
-120

Debt
Financial Independence
2004

Industry

2005

Industry

2006

Debt

2,091

1,964

2,631

Total Assets

1,624

1,632

1,384

Financial Independence Ratio

128.76

76.10

120.34

62.50

Industry

190.10

The ratio total debt/total assets of Company A, which measures the financial independence of the Company
towards third parties, shows us that its level of debt represents 190.1% of total assets in 2006. The rate has
significantly increased (up 58.0%) over the last accounting period. Over this period, the deterioration observed
when compared to the stagnation of the industry is primarily due to the increase in financial debt. The increasing
rate of debt is, over the last period, quite significant when compared to that of the industry average.
200,00%
180,00%
160,00%
140,00%
120,00%

Company

100,00%

Industry

80,00%
60,00%
40,00%
20,00%
0,00%
2004

2005

2006

Vulnerability of Company
K

2004

Industry

Bank Loan

107

Net Financial Debt

188

227

1,723

Company Vulnerability Ratio

56.76

6.10

Company A Analysis Completed on 11-10-2009

2005

0.38

Industry

1.40

2006

Industry

0.6

The Company vulnerability ratio corresponds to the significance of its overdrafts as a percentage of its financial
debt. The ratio has continued to decrease (by 100%). Over the last accounting period, the decrease observed is
more than that of the sector (57.1%). This change is due primarily to a decrease in financial debt. The ratio is clearly
less than the industry average, in absolute value over the last accounting period.
60,00%
50,00%
40,00%
Company

30,00%

Industry

20,00%
10,00%
0,00%
2004

2005

2006

Weight of Debt
2004
Financial Expenses (K)

73

Debt Ratio (%)

14.75188

Industry

2005

Industry

47
0

15.30

2006

Industry

40
0

5.81

Over the last period, the financial expenses incurred by the Company represented 5.8% of its Gross Operational
Margin Surplus. The ratio has steeply declined (by 62.0%) over the last accounting period as well as, in an irregular
fashion, between the beginning and end of the period. Over the last period, the improvement observed can be
compared to the industrys deterioration (11%). This change is mainly related to financial expenses and the gross
operating profit. However, the ratio remained, over the last period, less than the average observed in the sector. In
general, a rate of between 30% and 40% will be considered as normal (to be compared, however, with the industrys
performance), whereas a rate above 50% should be considered worrisome.
18,00%
16,00%
14,00%
12,00%
10,00%

Company
Industry

8,00%
6,00%
4,00%
2,00%
0,00%
2004

Company A Analysis Completed on 11-10-2009

2005

2006