Financial Services: XYZ Company Financial Analysis & Risk Report
Executive Summary
XYZ Private Limited has become conservative in some critical areas of performance
like, liquidity, borrowings, receivables, inventory and expense management.
Contribution of profit margin hasn’t been aggressive to overshadow the borrowings into organic
funding. Company has managed to convert risks from getting itself to grey zone but not come
yet in influence of safe one.
Last two years have been very critical in asset turnover and with very consistent financial
leverage, company has come up with management expense control.
Company has look into some key factors with respect to business case review –
- Operating Risk: Trade receivables decline with marginal increase in sales.
- Liquidity: Repayment of loans and inventory management are risks to be adhered
- Working Capital: Current Liabilities being managed under good control of Current Assets but provisions are not aligned with proportionate deltas.
- Financial Risk: Conservative being in organic funding aren’t being mapped to provisional strategy of both long and short term financing.
- Expansion Plans: Company hasn’t been able to forecast through financials that it is committed to expand in due course of bus
- Margin of safety: Company hasn’t been secured under break even sales category as 2% lower margin of safety is witnessed in current year
- CAGR (Revenue): Company’s compounded annual growth rate has declined to 10%
- Forecast: Huge risk of financial distress can be seen when current trend progresses without expansion in terms of revenue and retained earnings become the only source of working capital.
- Credit Rating Risk: With good repayment schedule and low risk of debt financing, credit risk comes down but financial performance of corporate efficiency has been declining to low profitability and high cost of materials.
Operating Profitability
Company has been trying to control risk in increase in variable expenses but cost of materials
have irrelative approach and need revenue growth and inventory control as basic short term
strategy.
- Revenue: Company has been witnessing growth over last four years, 2017 has been vertically progressive which integrates the sequential indicator as an outlier for average spike.
- Variable Expenses: Cost of materials have gone 6% high but revenue growth has barred to less than 1%. Challenges can be seen though management of inventory control.
- Finance Costs: Decline in finance costs to 4% from last four years have supported to mark net profitability below 100% of total revenue.
- Employee Expenses: Marginal increase in employee benefit expenses have maintained 2.5% - 3.0% which relatively cushioned the human resource retention and growth.
- Other Expenses: Down by 1% have surged contribution to retained earnings
- PAT: Management effectiveness and operational control lacks effective control with respect to net profitability declining to around 10% from last four years of performance.
- Overall: Strict inventory control ought to hit % age of revenue to less than 7% and revenue growth to 5%, other things being equal, could flourish profitability and growth.
Asset Efficacy
Balance Sheet has gone weaker over past four years of performance, stimulating higher
receivables, lower cash and bank balances and also long term loans and advances in noncurrent assets.
- Tangible Assets: Around 5% decrease in fixed assets with respect to tangibles have lowered down further investing funds to equipment, plant and machinery etc. Reducing average to less than 100 crore
- Long term loans and Advances: Company is managing around 3% of total assets with long term advance.
- Inventories: Inventory control with growing revenue is a challenge for the company being witnessed as 4% of total assets. Whereas, last two years, company had been trying to reduce stock but streamlined to around 14%.
- Trade Receivables: Receivables have gone around 19% higher compared to last year relatively demarking the working capital management.
- Cash & Bank Balances: Reduced balances to cash and bank in current year have managed company to less than 1.5% which establishes a great value to margin of safety to liquidity
- Overall: Company performed better with respect to assets as controlled liabilities lower than assets which supports well to Net Worth.
Capital & Liability Management
Reduced long and short term borrowings have backed better performance to enable declined
liabilities creating values to Asset Liability Control.
- Reserves & Surplus: Lowered profitability undermines the value and growth to net worth but restricted to around 5%. Last year performance spur had been relatively best to around 9% of total assets.
- Long term Borrowings: Management control to long term debts reduced the financial risk stimulating retained earnings’ churn to working capital as short term have also declined to around 10%.
- Short term borrowings:: Reducing short term limits for borrowings have encouraged risk to manage quick and working capital ratios for liquidity.
- Trade Payables: Controlled trade payables managed operations to efficacy under the net operating cycle to reduce the risk of credit default resulting to financial distress.
- Other Current Liabilities: Being around 20% of assets, other current liabilities need to be controlled which otherwise may undervalue the performance control of liabilities to assets efficiency
- Overall: Reduced borrowing flows have flagged well but higher revenues and Financial Distress scores are to be still analyzed as company has just come out from distress zone.
Cash Flow Analysis
Controlled cash flows, majorly from operations, have enthused organic growth to the company.
- Operating Cash Flows: Due to higher cost of materials, profitability acknowledges lower than the expected margins. Risk of operations is still pin pointed to higher variability
- Workings Capital Adjustment: Internal fund operations have managed well to lower down the risk of finance over last four years. Inventory control and debtors aging need to be scheduled under operational risk scores.
- Investing Activities: Lowered investments to business cycles have justified the relative financial cost risks with short team liquidity management. Company isn’t ready any short term distress and/or defaults like creditor’s aging harmonization with debtors’ days turnover and inventory days.
- Financing Cash Flows: Company has been performing better from last four years of operational control through remarkable internal organic financing activities. This conservative approach may lead to unjustified Revenue growth as expansion and development aren’t part of scalability.
- Overall: Lowered cash flows have been witnessed but gone risky to facilitate change in fixed assets structure and variable expenses over the time frame.
- Risks: : Reducing cash flows have also underlined 0.2% of assets cash defaults as a signal of revenue mismatched to business operations under the current asset adequacy and capacity management.
Operating Cash Flow Analysis
Risks defined for Operating Cash Flows and Management are lower revenue pumping to
declining expected profitability, witnessing declining trend of repayments adjoining to financial
costs and organic funding with higher provisions’ cycle.
- Finance Costs: Declined finance costs lowered down the risk of debt entrapment but increased risk of renewal and new businesses.
- Non - cash items adjustments: Higher non cash items’ adjustments are relatively riskier to liquidity strength and both short and long term solvency vision.
- Working Capital Adjustments: Highly skewed working capital adjustments have underlined company under outlier to Acid Test Ratio which need to be correlated to debtors’ aging profiles.
- Current Assets Adjustments: Huge control and management perspectives can be seen with very high crests and troughs in maintaining inventory and operations valuation. Risks are undervalued with unforeseen challenges.
- Overall: Operations are controlled but getting risker to the level of revenue growth, inventory control, debt management, asset adequacy and financial distress. Company is performing well to reduce the Debt Burden with fair and marginal outflows.
Efficacy
Profit after tax reduces with resulting to declined reserves and surplus over last four years
of performance. Net cash as being a part of organic financing strategy been demarked to
facilitation for lower borrowings and aging gaps. Conservative strategy to high risk with
respect to liquidity and solvency.
Revenue growth being linked to lower trade receivables profile resulting cash
business underlined to short term funding approach.
Operational Wagon Wheel
Expense Management
Cash Flow Infographics
Balance Sheet Quick Review
Liquidity, Solvency & Leverage
Profitability, Activity & Safety Circle
Asset Coverage, Expenses & Defence Interval
