Singapore 76% GPM 25% 23.8% Current Ratio 1 1.09

Singapore electronics (SE)
is a manufacturing firm that deals with computer and electronics products with
sales demand in Asia & Europe. The company successfully secured huge
contracts with large computer manufactures to supply next generation laptops
and smartphone which can be attributed to the firm’s impeccable character and
ability to deliver on the contracts. SE’s ability to reach a wider market is
evident in their product exportation to Asia & Europe.

 

The credit worthiness of
the company can be seen in the company’s ability to have secured an Overdraft
facility of 900,000 SDs with their present bank.

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The purpose of the Overdraft
facility of 900,000 SDs is to support working capital requirements as the
company’s reliance on spontaneous financing was minimal.

Although, the justification
for the increase in overdraft facility are increase in its turnover, reduction
in spontaneous financing and the potential growth that can still be maximized
by the customer, there is need for critical analysis of the financial and non
financial indicators.

 

BASIS
FOR DISCUSSION

 

Ratios

6 Months to 31st
Dec 2016 

6 months to 30th
June, 2017

revenue

950,000

1,260,000

%COGS

75%

76%

GPM

25%

23.8%

Current Ratio

1

1.09

Quick Ratio

0.55

0.61

Working capital

0

100,000

Cash conversion cycle

123days

148days

Working investment

600

950

 

The company witnessed
growth of 32.6% in sales due to improve contracts awarded to the business and
exportation to Asia and Europe. However, the gross profit margin reduced from
25% in December 2016 to 23.8% in June 2017 which is as a result of 35% Increase
in cost of sales. SE should be inclined to finding strategies to aid cost
reduction which would be commensurate to the improvement in sales.

 

A source of concern is the
increase in days for the company to convert cash to cash, there was an increase
of 25 days between the two periods. This can be majorly attributed to the
increase in ARDOH of 11 days though APDOH dropped by 8 days as it is evident
that the receivables and spontaneous financing (trade creditors) didn’t
increase proportionately.

The company is advised to
reviews its credit policy to its off takers especially beyond its borders as
the quality of these receivables cannot be ascertained. This is not healthy for
the company and the bank as repayment and effective utilization of the facility
is tied to the receivables. The counterparty risk has to be critically assessed
and addressed.

 

Additional information is
needed to determine why the company’s ARDOH increased from 92 days to 103 days.
We need to ascertain if this is a business decision (to attract more customers)
or customers inability to pay SE as and when due. The company needs to discuss
its relationship with its suppliers as their APDOH dropped despite increase in
supplies and turnover. The company can afford to rely more on spontaneous
financing rather than seeking to increase external facilities for working
capital requirements which will further increase expenditure and stress the
profitability of the company that has been already affected.

 

In terms of liquidity the
company can be regarded as liquid. There was a slight improvement in the
current ratio from 1:1 in Dec 2016 to 1.09:1 in June 2017. The current ratio
shows that the current assets can adequately cover for current liabilities. The
quality of the receivables will also determine how liquid the company is and if
the current asset can sufficiently repay the current liabilities. The working
capital is positive and shows that that the company can pay its short term debt
from short term assets.

 

The working investment
shows that a high proportion of their cash is tied to their trading assets
(inventories and receivables) leaving little or no cash for the day to day
running activities of the business.

 

The cashflow analysis also
reveals the company is presently is in a deficit position. The company would
have negative cashflow from their core business. Cash sales generated as at 30th
June 2017 is 1.03m Singapore dollars while cash payment in the period is 1.08m
Singapore dollars which will lead to a cash deficit of 50,000 Singapore
dollars.

 

CONCLUSION

 

Before we consider granting
a facility to the company, the following must be discussed:

 

ü  Information on the
management team must be provided.

ü  Qualification, experience
and expertise of management

ü  Mode of operations of the
company

ü  Security/collateral

ü  Strategy to hedge against
foreign exchange risk

ü  Strategies to aid cost
reduction

ü  Do they have facilities
with other banks? This is to determine gearing ratio

ü  To address counterparty
risk so as to manage the cash conversion cycle.

ü  The Increase in inventory
by 170,000 Singapore dollars might be a source of concern due to the nature of business
the customer is into.  With new
technology  coming up rapidly, the risk
of obsolete stock  needs to be addressed

ü  Expansion plan of the
company.