Case Study: Financial Analysis and Decision Making at Orange Manufacturing

Background: Orange Manufacturing is a mid$-$sized company that produces X products. The company has been growing steadily over the past five years, but recently management has noticed a decline in profitability. They are considering making strategic changes, including launching a new product line and cutting costs in underperforming areas.

The CEO has asked the finance team to analyse the company$$s financial position and provide recommendations. The finance team has provided the following financial statements from the last fiscal year:

Income Statement $($in thousands$)$ Amount

Revenue CostofGoodsSold Gross Profit Operating Expenses Operating Income Interest Expense Net Income

$$10,000$ $$6,500$ $$3,500$ $$2,000$ $$1,500$ $$200$ $$1,300$

Balance Sheet $($in thousands$)$

Assets

Current Assets

Property, Plant, and Equipment $($PPE$)$ Total Assets

Liabilities

Current Liabilities

Long$-$term Debt

Total Liabilities

Equity

Shareholder$$s Equity

Total Liabilities and Equity

Amount

$$4,000$ $$6,000$ $$10,000$

$$2,500$ $$1,500$ $$4,000$

$$6,000$ $$10,000$

Additional Information:

$$ Orange is considering a $$1$ million investment in new equipment for the new product line.

$$ The interest rate on long$-$term debt is $5\%.$

$$ The company expects a $10\%$ increase in revenue next year from the new product line if

the investment is made.

Tasks:

$1.$ Analyze the Financial Health of Orange:

o Profitability Analysis: Use profitability ratios like the gross profit margin, operating margin, and net profit margin to evaluate the company$$s current performance.

o Solvency Analysis: Calculate the debt$-$to$-$equity ratio and the solvency ratio to assess the company$$s financial stability.

o Liquidity Analysis: Use the current ratio and quick ratio to assess whether Orange has enough liquidity to meet its short$-$term obligations.

$2.$ Evaluate the New Investment Decision:

o Should Orange invest in the new equipment? Evaluate the impact of this investment on the company's financial statements, especially on debt, equity, and future profitability.

o Consider whether the expected $10\%$ revenue increase would justify the $$1$ million investment.

$3.$ Provide Recommendations:

o Should Orange proceed with the investment in new equipment?

o Are there any other areas where costs could be reduced to improve profitability?

o How can the company improve its overall financial health and reduce its reliance on debt?