A summary of the key points of the company’s financial picture that could influence the bank officer’s decision
Although the company has done averagely well in its financial performance over the years, this report identifies some key features of the financial nature that may affect the company’s ability to access the proposed loan from the bank. The constantly declining profitability of the company may severely impair the company’s strength to access the loan given the trend. The bank identifies reducing profitability as a significant factor that spells out the decreasing power of the company to manage or service its contingencies. The profitability index of a firm together with its trend speaks volumes about the market and financial strength of that particular company (Fight, 2004). However, the company has the capacity to neutralize this negative factor given its growing ability to manage its debts. Therefore, the company may cite the growing cost of relevant materials as the core factor leading to the reduced profit index.
The current ratio of the company indicates the innate ability to meet its contingent obligations throughout its daily operations. Our observable current ratio that improved from 7.06 in year 13 to 6.56 in year 14 shows the strength of the company’s solvency. The ratio is satisfactory as it shows that the company has focused more on building a strong set of assets that remain easily liquefied as contrasted to the liabilities. This implies that the examination of the current ratio of the company plus its trend over the two years may influence the bank’s lending decision (Fight, 2004).
The operating profit margin of the company may influence the bank’s decision to lend to our company. This rate indicates the proportion of the net sales that remain after considering the operating expenses. From the analysis, the financial report shows that the company managed to gain an operating profit margin of 2.9% in year 14 down from 3.79% recorded in year13. This means that the company remains with an average of 3.5% of its net sales to take care of non-operating expenses. In this case, the proposed loan by the company serves as one of the non-operating expenses.
The analysis of the acid-test ratio for the two-year period has a far-reaching influence on the bank officer’s decision to recommend the company for a loan. This ratio influences the ability of Custom Snowboards, Inc to convert quickly its cash and non-cash equivalents into liquid cash to cover its cash obligation (Fight, 2004). From a broader case, the analysis of this ratio by the bank will tell whether the company qualifies with respect to gaining an advantage over its ability to manage short-term obligations through the quick transformation of its current assets into liquidated funds.
The cost of goods sold indicated from the analysis has an influence on the company’s ability to convince the bank to lend it the proposed loan. From the ongoing analysis, the results obtained show that Custom Snowboards uses more of its resources in the production than it gets. This means that the bank may concentrate on our inability to minimize the operational costs while producing the products. The costs of production form 2/3rd of the total net sales for the company’s operations. This implies that although the company makes profits, much of this outcome ends up in operational expenses. Therefore, the company should design means of cushioning itself in order to maintain a relatively low operational cost margin. The constant rate of costs of goods sold means that the company maintains a constant rate of gross profit throughout its operational years. As a weakness, the bank may cite redundancy in the growth of its gross and net profits as necessary elements that indicate a slow operational strength.
On the issue of operating expenses, Custom Snowboards exhibits a constant rate of 11.8% over the three years from year 12 up to year 14. Although the rate kept at a constant is desirable, the need to improve it may result in the bank’s note. Therefore, it becomes one of the possible features of our financial shape forming the key decision component of the bank (Fight, 2004). From the analysis of the financial statements, Custom Snowboards has afforded to reduce its total liabilities to total equity from 56.5% in year 12 to 51.1% in year 13. In year 14, the firm maintained its declining liabilities by recording 47.2% of total liabilities to equity in year 14. This denotes its innate ability to utilize its internally generated funds in financing its operations. Historically, Custom Snowboards improved its current asset value by 23.6% in year 13 compared to year 12. Although the company dropped by 7% in terms of the value of its current assets in year 14, its current assets remained favorable at 46.6% of the total firm assets. This means that the company has the ability to service its short-term liabilities, thus able to settle the proposed long-term credit facility without much strain. The firm’s status in relation to the current assets will be of great significance in influencing the bank officer’s decision to lend to the company. The company’s current asset contribution of about 46% of the total asset value would be pivotal in deciding the fate of the loan application.
The ratio analysis indicates the ability of the company to repay the proposed 5-year loan
Custom Snowboards, Inc. has had a steady growth in its ability to sustain payment for its long-term debts. The trend analysis of our debt ratio indicates that the company can maintain a high-quality debt portfolio. In year14 for instance, the company maintained an estimated debt ratio of 38% as its average performance over the three financial years. The ratio has an implication of a company that has a high asset portfolio compared to its long-term obligations. Although the company declined its power of debt, it managed to record a 51.1% debt ratio in year 13. This ratio indicated a strong financial base exhibited by the company. The analysis further indicates that the company evolved its debt management strategies in year 14 to register a record debt ratio of 47.2%.
The ratio improved by about 4%. This trend showed that Custom Snowboards, Inc reduced its ability to rely on long-term debts within two years by 4%. The analysis shows that the company has maintained higher internal capital compared to its reliance on liabilities or external equities. The lower amount of borrowed funds, in this case, summarizes the ability of the company to maintain a low risk to the potential creditors to the company. The historical trend, thus, implies that the growth in terms of company assets has remained phenomenal (Fight, 2004).
Based on this factor of business strength, our company believes in attaining even much better results to meet the anticipated obligation that the company seeks to obtain. The low debt to the asset ratio by the company reveals its belief in formulating a strong internal efficiency to operate independently of excessive borrowing, which may impair its ability to progress smoothly. The company planned to achieve a projected 4.2 current ratio by the end of year 14. To experience this outcome, we have strategically positioned our operations to minimize the company’s short-term liabilities while boosting our current assets. In year 13, the company afforded a 7.06 current ratio, which was below the estimated ratio. However, the company stepped up its mechanisms to reach a current ratio of 6.56 in year 14, which indicated an improvement of 0.5 in terms of utilization of its cash and cash equivalents (Grier, 2007).
Although it is evident that the company has not hit its prior plans to establish a better strategy of utilizing its cash amounts, it remains devoted to ensuring a positive trend that can sustain the anticipated results. However, the inability of the company to meet the projected current ratio of 4.2 was due to its reduced short-term obligations. Therefore, the company’s sole dependence on its cash resources in financing company operations explains this trendy increase in cash and cash equivalent reserves.
The return on assets clearly depicts the capacity of the company to manage its capital assets in benefiting the company in innumerable ways. The return on assets represents the net income that the company generates per every dollar invested in its asset portfolio. The ability to exhibit a good ratio has an implication of whether we can maximally reap from the assets invested in by the business. Better management of assets expressly displays that Custom Snowboards, Inc will be able to leverage the bank in cases where it finds it challenging to service its loan in accordance with the term of credit. The company has surpassed the projected return on assets ratio of 4.80% anticipated by end of year 14. For instance, in year 13, the company achieved a ROA of 7.3% while in year14 it corded a 5.0% as its return on assets. Although the company declined its ROA by 2.3% in year 14, the figure has remained desirable compared to the industry average, and the projected ratio set by the company.
The company has a high capacity to convert its non-cash current assets into cash. This capacity explains why the company has recorded considerable excellent results in the current ratio. The analysis indicates that 30% of the total company’s assets constitute pure cash. This element continues to make us confident that the company will continue to ride on its rare ability compared to its immediate competitors in the industry. The company enjoys investor confidence as indicated by its ability to pay its dividends to the shareholders of the company. The price-earnings ratio has steadily improved from 66.22 in year 13 to 30.59 in year 14, which translates to an improvement of 35.63. In essence, the company has been able to sustain the interest of the shareholders since it believes that the shareholders form a critical component to the company’s progress (Grier, 2007).
The profitability of the company in terms of trend analysis continues to spur progressive growth. A snapshot analysis of the financial statements has given an impetus to the business by indicating that of the total net sales, an average gross profit of 30% has been maintained over a period of three years. Besides recording better results in terms of gross profitability, the company has the capacity of a streaming net profit trend over the four years of its operations. The trend analysis promises a better future into which the business remains focused. This projection borrows its sentimental confidence from the ongoing progressive growth in profits.
However, it is notable that the net profit for the Custom Snowboards has continued to decline over the three years of operation. The net profits from 2.6% of year 12 to 1.9% and 1.3% for years 13 and 14 respectively. The company, however, notes that although its profitability has reduced considerably, the trendy reduction cuts across the industry. Comparably, the company has done averagely well looking at it from the industry perspective. In reversing this trend, the company realizes that the inability to expand its product portfolio constricts its net earnings due to the ever-saturating market. The company acknowledges the fact that even though the company has maintained a low-profit percentage, its profits in absolute amounts have remained at a good average level. Given a strong product base, Custom Snowboards believes that it has the capacity to overturn the events to realize its previously budgeted profitability of 5.14% as indicated in its Pro-forma financial statements. This hope gains a plausible backing from the trendy slowdown in its operational costs aimed at achieving better profit performance.
The ability of our company to manage its inventory to satisfactory levels indicates that the loan shall be put into manageable inventory to boost the overall profitability while maintaining the capacity to service the loan. The company has maintained an inventory turnover of 33.3 over the two years of its operations. This implies that the company has the power to turn its inventory 33.3 times over its yearly sales operations. This average shows the ability of the company to manage its stock to desirable standards compared to the industry level. Therefore, wastage resulting from the inability to turn over the inventory has been managed properly in ensuring that the company gets maximally from its inventory. Although the company experiences extended costs in relation to production materials, its observable and unique sense of inventory management creates an assurance of future profitability (Grier, 2007). Based on this imperative, the company estimated that by the end of year14, it should record an inventory turnover of about 30.4. Although we have been unable to record this projected figure, the slow but steady improvement experienced over the two-recorded years gives an insight into the company’s ability to achieve these projections in a few years to come.
The debt-equity as a ratio is significant in establishing or appraising the financial structure of a given firm. This ratio examines the relationship that exists between the internal and external equities. I have endeavored to explore this ratio factor since it serves great importance to both the owners and creditors of the business. The lower the rate, the more it becomes desirable to the creditors. An increasing debt ratio implies an increasing trend in the shareholder’s funds or equity in the company. From the ratio analysis of Custom Snowboards Inc, the decreasing debt ratio shows that the company managed to reduce its long-term capital structures. This results in an indication that the company has reduced its obligations toward the payment of long-term debts and has increased its asset value by stepping up its asset portfolio. From the creditor’s view, the bank should examine our growth trends as far as the use of external equity is concerned upon this lucrative element.
The liquid sometimes called the quick ratio indicates the liquidity of the company’s financial position. Although slight differences have occurred over year13 and 14, the company’s liquid ratio shows that its solvency has remained sound over this period. The dependency of the company on the short-term liabilities and creditors has reduced considerably compared to the increasing short-term assets. The company exhibits a conservative structure of working capital in which it depends more on its internal efficiencies in financing its activities. The favorable liquid ratio is due to the expanded company’s quick assets compared to its quick liabilities. In general, this ratio satisfies the criterion of a company that shows the ability to pay its immediate liabilities more promptly without suffocating its cash and cash reserves (Grier, 2007).
The historical analysis of past performance
Custom Snowboards Inc has had continuous growth in most of its operational facets over the years. However, its profitability has remained on a declining trend for the past three years of its operations. The net sales trend analysis has shown that the company continues to make forward progress in the extent of its sales volumes. In year 12, the company recorded a trend percentage of 100 represented by net sales of $6,874,700. Although the incremental trend remained relatively small, the company managed to maintain an increase of 0.2% in its sales volumes in year 13. The same increase was experienced in year 14 when the company registered 101.2% in sales. This represented a 1% increase in sales volumes up from 100.2% recorded in year13. This trend in sales explains the slow but steadily rising profitability of the company that had stagnated over the past few years. Therefore, as the company continues to struggle with the increasing cost of production, necessary mechanisms in ensuring sustained profitability have been set up. The increasing production expenses have caused the reduced profitability recorded by the company over the period from year12 through year14.
An Analysis of what the historical analysis indicates about future performance.
The historical results recorded results have a bearing on the company’s future image in respect of its performance. While examining the level of operational costs, the company is headed to a manageable cost structure. This is due to the fact the company has ensured a constant rate of cost of goods over the three years. Given its ability to control the operational costs, the company seems capable of reversing the profit levels in the future. The increasing trend in net sales depicts the ability to achieve the projected sales levels of 100%, 103%, 102%, and 103.7% for the operational years 14, 15, 16, and 17 respectively. However, the ever-falling profitability due to the increasing cost of production indicates that the company might be headed for a less profitable future given the three-year profitability analysis.
How to improve the current operations through better cost controls
Although the current rating of Custom Snowboards Inc operations remains averagely good, the current situation in respect of operational cost needs an overhaul to meet the need for reduced costs for ensuring increased profits. The analysis of the company’s operational information shows that the operational cost facets eat much into the net sales revenues leaving little gross profits. Therefore, the company needs to establish the key operational facets that account for the ever-expanding costs. This can be achieved through implementing an activity-based costing system or responsibility costing (Gaughan, 2010). This change will converge with the already established internal controls to establish a plausible costs control mechanism capable of sustainable profit growth trends.
The dramatic decline in the profitability of the firm in year 13 by 34.3% and a further decline by 29.9% in year 14 may spell doom and could be of interest to the bank officer’s position on the proposed bank loan.
The firm’s ability in respect of the current assets would be of interest to the bank officer in making a decision. When assessed from the financial statements, the strong current asset value of Custom Snowboards forming about 46% of the company’s total assets shall be of great significance to the loaning process.
The internal and external risks that Custom Snowboards, Inc. will face with the plan for the acquisition option of the European SnowFun.
The loan payment for the proposed loan will amount to $189,179 as a yearly repayment amount for the next five years of its operations. From the analysis, the lease option presents to the company increased outflows compared to the buying option. Therefore, the lease option becomes a less costly approach compared to the purchase option. The resultant scenario implies that if the company decides to pursue the leasing option, it has to obtain a current capital structure of $653,355 compared to the purchasing option, which requires the present value of $659,146 after making a down payment of $50,000.
The internal risk of obtaining the European SnowFun remains its poor reputation of product durability experienced over the past few years of its operations. This may impede the profitability of Custom Snowboards in the European market considering its newness in the market scenario.
The other risks involved will be the reorganization in order to realize an operational internal control with a capacity to leverage the joint venture from the quality issues surrounding the proposed firm for acquisition (Gaughan, 2010).
On the other hand, the external risk that may face the new planned merger or acquisition is the increased earnings per share from the current 1.14 to 1.36 after the merger. This affects the overall profitability of the joint firm. However, it is worth noting that this brings with itself an increased investor confidence, though the joint firm runs a risk of over-reliance on external equity more than its operational incomes enjoyed before the proposed strategic acquisition (Gaughan, 2010).
In assessing the risk nature of the firm, the officer might consider its ever-falling profitability. The company recorded a 25.5% decline in year 13 from $178500 in year 12. The firm maintained this trend by registering a further fall in profits from $132,900 in year 13 to $93,225 in year 14, being a 42.6% decline. This historical record would spell a risk in terms of the ability to sustain the repayment of the loan given its constantly falling profitability over the years.
Recommendation of the strategies and techniques to mitigate those risks
However, although the firm has this inherent risk, it might mitigate the risk through its high asset base coupled with low liabilities. This means that although the company has falling profitability, it has an excellent asset value and a well-managed liability portfolio that would not impact its ability to repay the proposed credit facility. The position of fixed assets and their utilization by Custom Snowboards serves a critical role in this proposed loan package. The minimal liability obligations observed on the company’s balance sheet would indicate the firm’s ability to offer optimal security for the proposed loan that would minimize the risk of its inability to service the loan.
Implementing a strategic acquisition would seem a more beneficial plan for the Custom Snowboards. To cut down on the increased risks of operational costs, the company can implement an activity-based costing system that will consider the items leading to the increased operational costs. The increased shareholder equity means that the company can turn the increased debt ratio into a capital advantage. Currently, the scenario in the proposed acquisition demonstrates that the earnings per share shall increase considerably (Gaughan, 2010). Although this has a negative implication on the retention of profits for the company, its ability to increase the capital element needed will have far-reaching positive effects on the capital strength.
A summary of the expansion and the potential returns that will arise from the Acquisition Option
Although the acquisition of European SnowFun will present Custom Snowboards, Inc with an opportunity to reap in terms of independent profits due to the established image of the European SnowFunm the option may not serve to assist in penetrating the market. Its product that has since been established on the market will act to boost the product portfolio of Custom Snowboards. This will help in penetrating the European market given Custom Snowboards has a low market share within the European market. Usually, where a company has low influence in terms of sales in a specific market niche, a merger with a related company serves as a mechanism of penetrating the difficult market to gain a market presence capable of meeting the prevailing competition from the established businesses (Gaughan, 2010).
Final financing recommendation to the based on the Acquisition option
The analysis of the process to acquire the European SnowFun will mean that the company will need to access capital of about $732,522. This implies that the company shall have the full acquisition of the European SnowFun to allow for the commencement of the operations. This new plan will involve applying the new ABC system of costing to realign the operations in order to assure the company of the ability to penetrate the European market using the fundamentals established by European SnowFun over its long period of operation in the European market.
References
Fight, A. (2004). Credit risk management. New York, NY: Butterworth-Heinemann.
Gaughan, P. A. (2010). Mergers, Acquisitions, and Corporate Restructurings. Hoboken: John Wiley and Sons.
Grier, A. W. (2007). Credit analysis of financial institutions. London: Euromoney Books.