Horniman Holticulture

Analysis

Investigating HH¡"s financial statements and addressing each of Bob and Maggie¡"s expectations and concerns for the future will better illustrate a viable picture of the next three years that will transfer the value of the business to its owners while at the same time strengthen the long term prospects of Horniman Horticulture.

A first step was to prepare a statement of cash flows for years 2003 to 2005. As seen in Exhibit 1, HH has been in a net cash burn for the past four years.

The level of spending on net working capital (NWC) was an immediate red flag. In 2002, change in NWC was 1.57 times net income and ballooned to 2.54 times net income in 2004. Although 2004 saw an improved change in NWC to net income ratio, net cash decreased via capital expenditure. Although profit margins are above industry averages, the level of NWC spending far exceeded the industry. This is illustrated by HH¡"s 2005 days receivable, days inventory and days payable that are respectively, 2.34, 1.23 and 0.37 times the industry benchmarks (Table 1). These NWC issues need to be addressed and more closely aligned with industry norms. Since it takes a considerable amount of time to get mature plants that would eventually result in higher profits, the main focus should be on improving collections on the company¡"s receivables. Currently, vast amounts of cash are tied up in NWC and it seems to be bleeding HH dry.

HH¡"s balance sheet and income statement were analyzed to better understand the accounting reality, in order to uncover the economic reality (Exhibit 2). To start, sales and net income have been growing at an encouraging rate since the business¡" acquisition. Profit margins have been increasing consistently and they surpass industry averages by almost double in some cases (Table 2). These accounting measures of profitability mask the true economics of the situation. Although profit levels are higher than industry for HH, asset turnover levels are well below. In...