IntroductionThis report has been prepared as an evaluation of credit risk posed by our client’s, Australian Fungi Importers Pty Ltd’s, proposed bank loan. It is our company policy to carry out sufficient due diligence before issuing bank loans or extending existing credit facilities. This report will analyze the financial data of our client over a period of three years to help determine credit worthiness or otherwise of the client. Financial analysis will look into the liquidity, profitability and projected financial stability of the client. It is important that default risk is kept at an acceptable and reasonable level.
I believe the analysis carried out will enable you to make the appropriate lending decisions. Profitability AnalysisThe main aim of a business is to make profit. It is important for any business to make profits since prolonged periods of losses threaten the going concern of the business. Profitability ratios are important tools in assessing the business performance in terms of its profitability. Return on AssetsThis ratio is calculated by dividing, profit before interest and tax by total assets. It shows how well the management is utilizing the assets at its disposal to generate sales (Helfert, 1987).
The company’s return on assets has improved modestly over the year from 15.5% in 2010 to 18.5% 2011 and then to 28.7 % in 2012. The trend indicate improved utilization of assets, however the ratio is poorer than the industry average of 38%. This may not be badly off considering that Australian Fungi Importers Pty Ltd has been in operation for only 5 years and return on assets is improving. Shareholder Return Ratios These ratios include earnings yield, dividend yield, return on shareholder’s equity among others (Williams, 2003).
They are usually vital when analyzing financial data of listed firms. This is because they are the main drivers of share prices that affect market capitalization of a firm which impacts on capital growth of shareholder’s investments (Williams, 2003). However as Australian Fungi Importers Pty is not a listed company their use is of little significance. Profit MarginsThe gross profit margin of the company was relatively stable over the period averaging 55.4%. This was higher than the industry’s average of 49%. The ratio indicate that the company manages its direct costs better that its competitors.
This could be attributed to better supply chain management and better utilization of labor. This could also be because the main shareholders work for the company effectively and they have better knowledge of their European imports. Profit before tax is an indicator of how well indirect expenses are being managed (Friedlob, 2003). The main expenses include selling and administration costs as well as interest expenses. The company recorded an improving profit before tax over the years, 12% for 2010, 13.4% for 2011 and 20.9% for 2012.
This shows a rapid improvement and it actually bettered the industry’s average of 18.7% in the final year. This indicates that the company is increasingly managing its indirect expenses better. Net profit margin shed more light on tax management efficiency (Friedlob, 2003). The profit after interest and tax and profit before tax grew at fairly the same rate over the period, this indicate that there was no radical impact of tax management.