Diamond Foods Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Diamond Foods Inc. Case Study Solution

Liquidity Ratios:

The liquidity ratios of Diamond Foods appears to be in the later years as compared to the initial years, the quick ratios are good in the years 2006 to 2008, however, after the year 2008 the quick ratios reduced drastically. On the other hand, the current ratios are on the same pattern as well, they are decreasing in the year 2009 to 2011. The ideal current and quick ratio for any company operating in any industry are 2:1 and 1:1 respectively. The liquidity ratios werealigned with the benchmark in the initial years however, in the later years they becamevery lower as compared to the threshold liquidity ratios. The reduction in the liquidity ratios depicts that Diamond Foods can find it very difficult to settle its current liabilities by their current assets. Furthermore, Diamond Foods will also face severe difficulties in paying salaries to its employees as well which can ultimately reduce the earnings and sales of the company.

Profitability ratios:

The profitability ratios of Diamond foods appears to be very positive and have improvedoverthe years 2009, 2010 and 2011. The gross profit margin increased by 100% in just two years while the net profit margins also doubled in two years as well. It can be argued that the rapid increase in the profits are mainly due to the potential accounting fraud which the senior management is doing by giving momentum payments to the suppliers. Furthermore, the return on assets and return on equity havenot increased drastically in any of the years which also indicates the potential earnings fraud at Diamond Foods Inc. If the momentum payments are added in the cost of sales in the fiscal year 2011, the earnings would have decreased drastically, it can be said that the sole purpose of these so called loyalty bonus wasto increase the profitability for the year 2011 and the substance of this loyalty bonus wasnot more than the momentum payments.

Efficiency ratios:

The Accounts receivable days are almost the same as they were in the years 2006, it can be said that the performance of the credit control department of Diamond Foods is performing good which can be very beneficial for the company, firstly the liquidity position will be improved as the cash will be tied-up for the lower period and the chances of bad debts will also be increased which will ultimately increase the profits of the company. On the other hand, the inventory turnover days are decreasing which willalso be favorable for the company because of the sensitive nature of the inventory. The inventory of Diamond foods can be easily damaged and the inventory also needs goodsafety system which can increase the holding costs of the inventory. If the inventory is heldfor longer period than the holding costs will also be higher. The accounts payable days are decreasing, this is also classified as favorable for the company because the company can avail substantial early payment discounts by making early payments to the suppliers and the relations will become more favorable with the suppliers as well because of these early payments.

Diamond Foods Inc. Harvard Case Solution & Analysis

Solvency ratios:

The solvency ratios of Diamond Foods are very poor, the gearing ratio hasincreased at an extremely high rate which can be very dangerous for the company. The company will have to pay higher amounts in terms of interest which can deteriorate the profit position of the company. Furthermore, the risk of common stockholders havealso increased if the gearing ratio is higher, this can also make the profits more lower because the common stockholders are now also demanding higher returns because of the higher risk profile of the company. In addition to this, the loan providers can place many restrictive covenants which can reduce the pace of the growth and failure to comply with these covenants can result in early redemption of the loan which can even impact the going concern status of the company as well. The interest cover ratio of Diamond Foods is also very poor, the interest cover ratio is reduced by almost 1000% which can be an alarming situation for the Diamond Foods, little increase in the interest cost or reduction in the profits could make the interest cover ratio more poor which can have many adverse consequences on the financial position of the Diamond Foods.......................

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