Fleetwood Corporation Case Study: Financial And Business Performance Information

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Executive summary
In this report on Fleetwood corporation case study, the financial factors of Fleetwood Corporation have been analysed. In order to do so, the financial data has been collected from the income statement and balance sheet of the company for 2017 and 2018. After making ratio analysis in the context of this Fleetwood corporation case study, it has been observed that the company is facing problem due to excessive loan in the capital structure. This, it has been recommended to reduce the loan and replace such capital with retained capital.

Introduction
The present Fleetwood corporation case study is focused on discussing about the improvements in the performance of a company. The financial performance and the existing strength and weakness of a company are required to be known as these two factors help the managers to identify the loopholes in the process. This report emphasises the qualitative analysis for identifying the external factors and internal strengths and weaknesses of Fleetwood Corporation along with the financial facts and figures. The aim of the Fleetwood corporation case study is to identify the factors that restrict the company to grow and to recommend the process that will help the company to improve its financial performance of the company.

Section one: Analysis of data
1. PESTL, SWOT analysis within this Fleetwood corporation case study based on the information given in the annual report of the company
PESTL Analysis
Policial Factor: In the political factor, the change of tax rate in 2018 can be said as impactful to the company. New taxation rules have been enacted by the Australian government from 1st January 2018, which has been incorporated by the company as per the information provided by the company in its annual report (Our Businesses | Fleetwood Corporation. 2019). As per this change, the companies in Australia are now required to pay tax at the rate of 21% instead of 35%. As a result of this, the tax liability of the company would fall. As a response of this change, the company has concentrated on generating more revenue to mitigate the impact of the higher tax rate.

Economic Factor: Reserve Bank of Australia has announced a fall in the interest rate and as a result of that the cost of borrowed capital of the company has also fallen in 2017 and 2018 (Our Businesses | Fleetwood Corporation. 2019). This can be considered as a positive external factor that has helped the company to enhance its capital base. In order to take the benefit of the fall in the interest rate, the company has taken short term loans for funding the working capital requirement of the company.

Social Factor: As per the disclosed information, the company has a high degree of acceptability of its product in the education sector and affordable housing sector (Our Businesses | Fleetwood Corporation. 2019). This factor can be found as helpful in expanding the business in the country, and as a result of this social factor, the company has planned to expand the business scale in every region in the country, which has been disclosed in the reports of the company in 2018.

Technological Factor: In order to serve the customers, the company uses computer-based planning tools. This is done by using appropriate software, and this factor can be considered as helpful for the organisation to provide secured service to the clients (Our Businesses | Fleetwood Corporation. 2019). The company has implemented ERP based accounting and operations management software in 2018 to avail the facility of cloud storage and secured execution of transactions.

Legal factor: The Company operates in Australia as a corporate firm, and due to this reason, it needs to follow the provisions of the Corporations Act, 2001 for remunerating the directors and other corporate activities (Our Businesses | Fleetwood Corporation. 2019). Moreover, it requires abiding by the rules of ASIC in order to meet the listing agreements of the ASX.

SWOT Analysis
Strength: The strength of the company as per its recent annual report is its high proportion of operating cash flow (Our Businesses | Fleetwood Corporation. 2019). This strength shall help the company to pay off its short term obligations, which will facilitate the company in maintaining the industry average liquidity in future.

Weakness: Recently, in 2018, the company raised a loan for $4 million, and this shall have a negative impact on the income statement of the company in future accounting years (Our Businesses | Fleetwood Corporation. 2019). As the company would have to incur a fixed financial charge for this loan, it is to be considered as a weakness to the company.

Opportunity: As disclosed by the company, the demand for modular accommodation is rising in Australia. Thus, this can be considered as the opportunity for the company (Our Businesses | Fleetwood Corporation. 2019).

Threat: The Company is facing a lower volume from the affordable retirement sector, and this may have a negative impact on the overall profitability of the company (Our Businesses | Fleetwood Corporation. 2019). This can be considered as the most impactful weakness of the company as per its disclosure.

2. Financial analysis on the basis of profitability, efficiency and stability of Fleetwood
Profitability Analysis

Table 1: Profitability Ratios
(Source: As created by the researcher)

From the above table provided in the context of this Fleetwood corporation case study, it is clear that Fleetwood Corporation has been able to enhance its net profit and return on asset irrespective of a decline in the gross profit margin in 2018. In this regard, it is to be noted that the gross profit of the company has been seen as declined due to the hike in the cost of the material. However, the company examined in the Fleetwood corporation case study has been able to decrease its operating charges and enhance its non-operating incomes and as a result of this, the net profit margin has increased from 3% to 5% in 2018. This result shows its reflection on the return on asset of the company, and the growth of this return was similar to the net profit margin of the company. Therefore, it can be concluded in this Fleetwood corporation case study that overall profitability in 2018 has increased due to the rise in the non-operating income and the fall of other standing charges of the company in 2018.

Efficiency Ratios

Table 2: Efficiency Ratios
(Source: As created by the researcher)

The above ratio analyzed in the Fleetwood corporation case study clearly shows that the inventory turnover ratio of the company has enhanced to 1.68 times in 2018 from 1.54 times in 2017. This clearly expresses that the holding period of the company is decreasing year by year. This would help the company in controlling the inventory holding cost in future. On the other hand, the working capital management of the company as reflected through the accounts receivable turnover ratio discloses that the frequency of receiving cash from the customers has fallen in 2018 as the accounts receivable turnover ratio of the company has enhanced from 4.04 times to 6.79 times in 2018. This can be considered as the result of poor receivables management policy of the company. Finally, the results obtained in the Fleetwood corporation case study mentions that the asset turnover ratio of the company has enhanced to 1.11 times in 2018, this can be interpreted as the utilisation of the asset for generating revenue of the company has enhanced in 2018.

Stability Analysis

Table 3: Stability Ratios
(Source: As created by the researcher)

In the above table, the stability of Fleetwood Corporation has been analysed by considering debt to asset ratio, current ratio and quick ratio. From the quantitative information as disclosed above within this Fleetwood corporation case study, it can be stated that the proportion of short term and long term debt of the company to its total assets have fallen in 2018 as compared to 2017. This is the result of the repayment of short term obligations of the company in 2018. Apart from this, the current ratio of the company is above the industry average, and this can be justified as the result of sound working capital management policy of the company. Similarly, the quick ratio of the acid test ratio of the company was above the industry standard of 1:1 in 2017, which has declined in 2017, however, as this ratio is in standard level, it is to be stated that the company is in stable position as pr as the short term and long term liabilities and assets are concerned.

3. Examination of sales, profit, cash flow debts or liabilities and assets
a. What are the issues identified in the Fleetwood corporation case study?
In the annual report of the company investigated in the Fleetwood corporation case study, it has been seen that the material cost of the company has enhanced significantly in 2018. This can be identified as an issue to the company for the reason that this may cause a fall in the gross profit margin of the company. On the other hand, the other hand, it has been evidenced from the above discussion that the long term debt of the company has increased significantly in 2018. In this context, Robinson, Henry, Pirie & Broihahn (2015) cited that enhancement of loan capital in the capital structure results in a rise in the fixed finance cost and therefore, the profit available to shareholders’ falls due to such rise in loan capital. As the company has reported an increment in the finance cost in its income statement, it can be considered as the effect of such an increase in the fixed interest-bearing loan in the balance sheet. Thus, the hike in finance can also be considered as an issue as this cost would have a negative impact on the net profit of the company in future. Here, in order to prioritise the issues, it can be stated that enhancement in the material cost is the most impactful issue among the identified issues, as this cost is uncontrollable in nature.

b. Performance
Identification of expectation, goals and business objective of Fleetwood Corporation
Fleetwood Corporation expects to grow its business in every part in Australia and for this purpose, it wants to enhance its performance quality. In addition, the company expects to generate goodwill that will help the company in getting new orders. The company intends to focus on its Modular Accommodation segment along with Parts and Services and the Village Operations segments for meeting the stated expectations.

The goal of the company is to acquire new markets in the Australian region. Due to this goal, the company wants to avail more projects in Western Australia, as the company has not got any project at this part of the country.

The objective of the company outlined in the context of this Fleetwood corporation case study as disclosed in the annual report is to outperform in the market financially by providing genuine value to the customers. Therefore, it can be stated that the company has the objective to enhance the customers’ perceived value.

Relevant legal requirements
It is commented in this segment of Fleetwood corporation case study that the company is listed in the ASX and must abide by the provisions of the Corporations Act, 2001. In addition, the company would also require following the provisions of the Work Health and Safety Act 2011, as it employs staffs for operations. As the company deals with the design of modular accommodation, it would also require to follow the Intellectual Property Laws Amendment Act 2015 (Tricker & Tricker, 2015).

Comparison of the financial performance of the company with industry benchmark
As per the calculations made above, it can be stated that the net profit ratio of the company is significantly lower than the industry average. In 2018, the net profit margin of the company was 3%, whereas the industry average net profit ratio of the company is 10% (Abbas, 2017). This low profitability may be assumed as the outcome of the strategy of the company to enhance the perceived value of the customers. In other words, it can be stated that the company charges low price to increase value to the customers. In addition, the receivable turnover ratio of the company is also low at 4.04 in 2018. The industry average receivable turnover ratio is 10, which means that the company wants to attract new customers with a low degree of pressure on customers.

Business operation plan with performance KIPs
The operation of the business is required to be provided with the target-based controlling process. In order to do so, the following key indicators of performance are required to be considered.

Table 4: KIPs
(Source: As created by the researcher)

Review and monitoring plan
In order to meet the above-mentioned target, the company is required to form a special team for evaluating its performance in a regular manner. For putting control over the operation, an operating budget is to be prepared initially. The team is to make variance analysis by comparing the actual figures and budgeted figures for lowering cost and to meet the business needs of the company. This team is to modify the budget time to time in order to meet the requirements of the managers of Fleetwood Corporation. This shall facilitate the company to achieve its business needs effectively.

c. Profitability analysis
As per the analysis made in the above portion of the Fleetwood corporation case study, it is clear that the company has earned gross profit at the rate of 62% in 2018, which was 63% in 2017. On the other hand, the net profit margin of the company was 3% in 2017, which has increased to 5% in 2018. This increase may be the result of the hike in the non-trading income of the company in 2018.

The return on asset of the company was calculated at 3% in 2017 and 6% in 2018, which can be the result of the rise in the net profit of the company.

The gross profit trend has been seen as declining, however, the net profit and return on assets ratio have been seen as increasing. These profits have enhanced due to the rise in sales volume, which is an objective of the company. As the trend of overall profit is positive, the net profit in 2019 and 2020 may be expected to rise.

d. Efficiency analysis
The inventory turnover ratio of the company has been seen as increased in 2018 from 1.54 to 1.68, which can be considered as a positive inventory management policy of the company as this rise indicates a low inventory holding. On the other hand, the receivable turnover ratio of the company has enhanced in 2018 from 4.04 to 6.79, which indicates that the payment frequency of the debtors is increasing.

The asset turnover ratio of Fleetwood Corporation has been calculated at 0.98 times in 2017 and 1.11 times in 2018 and this indicates that the asset utilisation ability of the company is having a rising trend.

From the above discussion provided in this Fleetwood corporation case study, it can be said that the efficiency of the company to utilise the working capital and assets is improving, which is aligned with the business strategy of the company. In addition, it is to be noted that this trend will be continued to 2019 and 2020, and the company, as a result, would be able to use its assets to generate more revenue.

e. Stability analysis
The debt to asset ratio of the company has been calculated at 27% in 2017 and this amount has decreased to 25% in 2018. This is the result of the fall in short term liabilities from the books. On the other hand, the current ratio of the company has decreased to 2.08 in 2018 from 2.20 in 2017. This may be the result of paying short term loans of the company. This cause has also impacted upon the quick ratio, which has fallen from 1.29:1 to 1:1 in 2018.

As the long term loan of the company has increased to $4 million, the degree of financial risk of the company will rise, and as a result, the net profit of the company would also see a fall in next accounting years.

The increase in the debt capital may be the indicator of expansion of scale of the company, which is one of the goals of the company. If the above-mentioned trends provided in the Fleetwood corporation case study are continued, the capital base of the company would rise, which will help the company to enhance the scale of business of the company in 2019/2020.

Section Two: Financial and performance advice to Fleetwood Corporation
4. Advice regarding financial and performance to Fleetwood Corporations
a. Recommendations for financial viability: From the analysis made above within this Fleetwood corporation case study, it is advised to the CEO of Fleetwood Corporation to reduce the debt capital of the company as this source of capital enhances the degree of financial leverage and as a result, the net profit of the company is also affected. In addition, it is also recommended to minimise the debt funding in four equal installments, which will not affect the current level of operations of the company. In addition, it is also recommended to the firm to form the long term capital by issuing equity capital and this is reccpmended to the company as this source of capital would not result in an enhancement in the degree of financial leverage of the company. As per the research utilized to prepare this Fleetwood corporation case study the short term capital is suggested to be raised by taking short term loan from banks as this funding source would not create pressure regarding the fixed finance cost on the income statement.

b. Plans for managing risks, contingencies and future cash flows

In order to manage the risks associated with the operations of the company, it is recommended to prepare budgets by considering all he expected transactions and events. This will facilitate the management to get rid of the impact of contingent facts. In addition, a cash budget is also advised to be prepared for identifying the estimated cash balance in hand on a particular future debt. 

c. Advice regarding options of risk management and right and obligations and tax management issues
For managing risks, it is recommended to the CEO of the company to raise capital for owned sources such as equity financing or retained earnings. These sources of capital have no fixed charges and therefore fixed financial charges can be minimised from the income statement by raising capital by considering these sources. Moreover, it is recommended in this Fleetwood corporation case study to appoint advocates to look after the legal and tax management related issues. As the tax rate in Australia has enhanced, the company would require focusing on making investments for which tax benefits can be availed. In this regard, the company may make capital incentives in order to get further incentives. 

d. Advice regarding new or alternative finance sources
In the discussion on Fleetwood corporation case study, it has been seen that the debt financing has resulted in a fall of the net profit of the company and therefore, it is recommended to the CEO of Fleetwood Corporation to consider retained earnings as the source of long term capital instead of taking further loans against interest. This recommendation is made due to the reason that the income statement would not get affected by funding through retained earnings and therefore, the company may report a higher amount of net profit in future.

Conclusions
In this Fleetwood corporation case study, it has been seen that debt funding creates pressure on the profitability of a company, and therefore this source is ignored by the management. A similar situation has been observed within this Fleetwood corporation case study, and due to this reason, it has been recommended to the company to reduce the debt capital and raise further capital by using the retained earnings of the company.

Appendix

References
Abbas, A. (2017). Fleetwood corporation case study Earnings fraud and financial stability. Asia Pacific Fraud Journal, 2(1), 117-134.

Our Businesses | Fleetwood Corporation. (2019). Retrieved 8 November 2019, from https://www.fleetwoodcorporation.com.au/our-businesses/

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Fleetwood corporation case study Oxford University Press, USA.