Garry Hal-per Me-swear Limited: A loan request for an export order Case Study Solution
Financial Performance Analysis
Financial performance analysis is the process of creating a relationship between the items of the income statement and balance sheet of the company in order to gain a deep understanding of the company’s financial strengths and weaknesses.
Ratio Analysis:
Ratio analysis determines the financial strengths and weaknesses of the company and also reveals the performance and position of the company overtime. Income statements and balance sheets of the fiscal year 2009 till 2012 are used to calculate the financial ratios of the company. In the ratio analysis, different ratios have calculated which includes profitability ratios solvency ratios and liquidity ratio in order to analyze the company’s performance and financial position. Moreover, ratios have been calculated on the basis of the pro forma income statement and balance sheet as well.
Note: See Exhibit-1: Financial Performance Analysis
Profitability Ratios:
The profitability ratios are used to assess the company’s ability to generate profits, revenues, and other profit margins during a specific period of time. A profitability ratio is one of the most frequent tools of financial ratio analysis which determines the company’s bottom line after deduction all the revenues. It also used to measures the company’s efficiency in a generation the profits by cost management. The different ratio which has been calculated in order to measure the profitability of Inditex which includes gross profit margin, net profit margin and return on equity.
Gross Profit Margin:
The gross profit margins show the financial health of the company after deducting the cost of goods sold from sales. The company’s gross profit margin shows an increasing trend from the fiscal year 2009 to 2012. GHM gross profit margin was 16% and 19% in the fiscal year 2009 and 2012 respectively. The increasing trend in gross profit margins shows that the company is efficiently using its cost and generating its profit from the sales. However, according to the pro forma analysis, the company gross profit margin would be 16%. Although the sales of the company would almost double in 2013 it would lead to an increase its cost of goods sold as well.
Net Profit margin:
Net profit margins show that how much profit the company earns after paying all the expenses which include operating expenses, interest and tax expenses. It shows the overall performance of the company. The company’s net profit margin was 1% to 2% during the fiscal year 2009 to 2012. The company is spending a very huge amount on its expenses. However, after expansion, the GHM’s net profit margin would be 5% which indicates that the company would earn better profits in comparison with previous years.
Return on Equity:
Return on equity is one of the profitability ratios which shows that how much return the shareholders get for the money invested in the company.The return on equity was decreasing each year from 2009 to 2012. ROE indicates that the company is not efficient in generating profits. However, in the fiscal year 2013, the estimated ROE would be 50% which that the company would run its operations efficiently and effectively which would lead to an increase in its net income.
Liquidity Ratios:
The liquidity ratios show the company’s ability to convert its assets into cash or how efficiently the company cashes its assets. It shows the company’s ability to pay off its debts. The working capital ratios have been calculated in order to measure GHM's ability to convert its assets into cash.
Working Capital Ratio:
The working capital ratio shows the short term liquidity position of the company. In other words, it shows the company’s ability to pay off its current debts (current liabilities). The working capital ratio of GHM, during 2009 was 1.663 however, during 2012 the current ratio of the company decreases slightly and reaches 1.485. The current ratio shows that the company is in a strong position to pay off its current liabilities by using current assets. The company has more assets in comparison with its liabilities. However, the net working capital ratio in the fiscal year 2013 would be 1.592 which also indicates that the company would have sufficient assets to pay off its current liabilities.
Solvency Ratios:
The solvency ratio shows the portion of the debt in the company’s assets and equity. It also shows the company’s ability to meet its debt obligations. The Debt-to-Asset and Debt-to-Equity ratio has been calculated in order to identify the company's ability to pay off its debt obligations.
Debt-to-Equity:
Debt-to-Equity shows that how much the portion of the debt is included in overall investment. The company’s debt to equity ratio was 4.344 in 2009 which increased to 6.271 in the fiscal year 2011. However, in the fiscal year 2012, the debt to equity ratio decrease and reaches 4.042 which indicates that the company raises most of the financing through debt. GHM’s debt to equity ratio is very high which shows that risk potential is high in this business. Therefore, the investors of the company would consider the company risky. Moreover, in 2013, the debt to equity ratio would be 2.588. Although it is almost half of the previous year’s debt to equity, for investors it is very risky to invest in this company.
Debt-to-Asset:
The debt to asset ratio shows how much the company assets are financed by the debt. The debt to asset ratio Inditex during 2009 was 0.813 while it has reduced to 0.785 during 2010. However, it remained constant in 2011 and 2012. The debt to asset shows that 8% of the company’s assets are financed by the debt. The lower debt to asset ratio shows that the company has a small burden of debt in comparison with its assets. As the debt to asset ratio of the company is less than 1 which indicates that the company has the potential to pay off its liabilities.
The decision as a Confederation Bank
On the basis of the above analysis, as a confederation bank, I would invest in the company because the company has the potential to grow and it has sufficient assets to pay off its liabilities. Although the debt to equity ratio is very high the company has sufficient assets to pay off its liability. The working capital need of the company is $531600 which in between the range therefore, the bank would provide funds to the company on the basis of terms and condition which includes the company would have to keep their assets as collateral. As it is a sole proprietorship company and debt to equity ratio is also very high which indicates higher risk. Therefore, in order to get financing, the company would have to keep its assets as collateral................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
10 Insights: First Look at The New Intelligent Enterprise Survey on Winning With Data & 10 Data Points: Information and Analytics at Work
Michelle Levene (C)
Euro-Dollar Decision (A)
Hotbank: Softbanks New Business Model for Early Stage Venture Incubation
Jan Carlzon SAS Video
DESSO (A) – Taking on the Sustainability Challenge
THE BULLARD HOUSES – General Instructions
Examining the success factors required in managing a sustainable one-man consulting business in the telecoms sector
HR
Teva Pharmaceutical Industry
