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 on the company’s strength to access the loan given the declining trend. The bank identifies the reducing profitability as a significant factor that spells out the decreasing power of the company to manage or service its contingencies. Profitability index of a firm together with its trend speaks volumes about the market and financial strength of that company (Fight, 2004). However, that 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 the 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 remains 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 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 its cash quickly and non-cash equivalents into liquid cash with a view to cover its cash obligation (Fight, 2004). From a broader case, analysis of this ratio by the bank will tell whether the company qualifies with respect to gaining advantage over its ability to manage short-term obligations through 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 shows 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 as 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 to52%, in year 13. In year 14, the firm maintained its declining liabilities by recording a 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 can 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 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 company intends to use the loan in expansion of the company. Part of it involves merging with the European Snowfun Inc. These expansions are projected to cause an increase in cost of production, and this may affect the company ability to repay the loan requested. Material and labor requirements are each expected to increase by 5% above the projected yearly budget. What is of more concern is the fact that, up to this end, the variable overhead has already exceeded by 10%. This acquisition will result in the loss of the shareholders investment as the shares of the big company automatically depreciates. This may drive investors away who seek to invest in other attractive ventures.
Despite the fact that the market of the custom snowboard Inc has shown a gradual increase as a result of the global economic recession, the winter Olympic Games increased the sales considerably. The sale projections for the next three years are also very promising increasing the company ability to pay its debts.
In assessing the creditability of the company from its financial statements, the bank can be assured that the information presented in the there is reliable. This is because the management has instituted strict measures that ensure that the financial statements of the company reflect the actual financial position of the company. This helps the bank in making lending decision based on reliable facts and not false data. In the year14 on December 31st, the efficacy of the internal control of the company on ensuring reliable financial data was accessed. A report issued from this exercise showed that its financial statements were incredibly reliable (Brooks & Brooks 2010).
The ratio analysis indicating the ability to of the company to repay the proposed 5-year loan
The 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 the debt, it managed to record a 52% 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 a 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 a period of two years by 4%. The analysis shows that the company’s has maintained higher internal capital compared to its reliance on the 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 (Fight, 2004).
Based on this factor of business strength, our company believes in attaining 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 independent of excessive borrowing, which may impair on 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 increased 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, that 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 the 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 the 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 by 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. Snapshot analysis of the financial statements, has given an impetus to the business by indicating that of the total net sales, an average gross profitability 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 the 2.6% of year 12 to 1.9% and 1.3% for year 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 has remained at a good average level. Given a strong product base, the 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. This is in order 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. 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 to the business. The lower the rate, the more it becomes desirable to the creditors. An increasing debt ratio implies an increasing trend in the shareholders 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 increased its asset value by stepping up its asset portfolio. From the creditor’s view, the bank should examine our growth trends in as far as use of external equity is concerned upon this lucrative element.
The liquid or 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 a lot 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
The Custom Snowboards Inc has had a continuous growth in most of its operational facets over the years. In the 1980s, the snow board market was still very far from being totally explored, and the market growth was slow and steady. This is because the number of people interested in skiing was very minimal. Nevertheless, after the next decade, people became interested in skiing and other snow related sports. This caused a rapid expansion of the snowboard marked which was reflected, in a steady growth in the Custom snowboard Inc, company. However, its profitability has remained on a declining trend for the past three years of nits 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 where 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. This means that there is a need for the company to look into its production procedures and come up with ways of reducing the production costs. This will reverse the negative growth trend. One way it can do this is by seeking alternative marketing techniques that are less expensive compared to the strategies it currently employs.
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. Nevertheless, there is need the company to explore other ways of improving its performance in the market such as coming up with new innovations that will give it a competitive advantage over its chief competitors. It should also expand its line of operation to may include other sports besides skating and skiing. This diversification will ensure decentralization of risks from one line of operation. This ensures that when production in one sector declines, the company can still get profits from the non-affected sectors.
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 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 company plans to acquire a new company and this can be a way of reducing production cost. This results from the increased economies of scale and acquisition of new assets at no cost (Bruners, 2004). Another way that the company can reduce its production costs is by downsizing its operations at Minneapolis. By doing this, company will be in a position to enjoy low manufacturing costs and be exposed to more sourcing opportunities. This move is estimated to result in gross annual profit increment in the coming years. This would ultimately result in an increase in sales as a result of creation of a shortage of products from this company which are the most durable and of the highest quality compared to the other companies distributing the same products (Brooks & Brooks, 2010).
Another way thorough, which the company can reduce production costs is by laying off workers, in cases where the employees are too many than what the company requires. This ensures that the available man power is fully utilized, and none of the available resources goes untapped. Production costs can also be reduced by keeping good inventory records and ensuring that the supplies orders are used efficiently reducing lose and wastage. Before acquiring a new equipment or event signing a new contract, the company should carry out its research so as to ensure that it acquires the equipments at the best price in the market. The company may also consider opening production plants in other countries where production cost is manageable.
In most instances, the production cost of a company is increased by the marketing strategy employed. To overcome this, company should opt for less expensive marketing and advertising methods (Brooks & Brooks, 2010).
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
By acquiring a company within its line of operation, the Custom Snowboards Inc exposes itself to greater risks of collapsing in case the operation within that industry goes down. This is unlike a mergence with a company in a different industry which reduces the risk of collapse. This is because the there is diversification of the company’s risk.
The custom snow board plans to acquire the European Snowfun company in its expansion project plan. This could associate with several internal risks which could result in the company getting into a financial crisis (Bruners, 2004). One of the risks that the company is prone to run into is the reduction of profit as a result of increased cost of production. It is projected that with the merging of the company with the European Snowfun, the material and labor costs will amplify by 5% each, which will increase the overall production cost, greatly reducing the profit margins. The plan to have personalized, painting for products from this company could backfire when the customers fail to go for the personalized painted products which are more expensive than the normal selling price. This would cause irreversible losses as the exercise requires 40 $ licensing, additional labor of 15$ per hour and additional production material of 20$. However, the option of personalized painting has proven to be quite accepted with a sale output of 20% while the normal products have a sale of 80%.
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 risks of obtaining the European SnowFun remain its poor reputation of product durability experienced over the past few years of its operations. This may impede on the profitability of Custom Snowboards in the European market considering its newness in the market scenario.. The company recorded a 25.5% decline in year 13 from $178500 in year 12.The firm this trend by registering a further fall in profits from $132,900 in year 13 to $93,225 in year 14, being a decline of42.6%. 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.
In assessing the risk nature of the firm, the officer might consider its ever-falling profitability. The corporation documented 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
To overcome the risk associated with the merging of the company with the European Snowfun company, the company could implement the personalized project plan as a pilot project and access its performance before investing in it (Brooks & Brooks 2010).
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 a falling profitability, it has an excellent asset value and a well-managed liability portfolio that would not impact on its ability to repay the proposed credit facility. The position of fixed assets and their utilization by Custom Snowboards serve a critical role in this proposed loan package. Clearly, the minimal liability obligations observed on the company’s balance sheet would indicate the firm’s ability to offer an 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 benefiting plan for the Custom Snowboards. To cut down on the increased risks of operational costs, the company can implement an activity-based cost 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
Despite the fact that the acquisition of European SnowFun will present to Custom Snowboards, Inc with an opportunity to reap in terms of independent profits due to the established image of the European SnowFun the option may not serve to assist in penetrating the market. Its product that has since been established don 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 with an aim of gaining a market presence capable of meeting the prevailing competition from the established businesses (Gaughan, 2010).
Merging with a company within the same industry reduces unfair competition and so the company is able to come up with favorable pricing as a result of the large economies of scale. Another benefit that the Custom Snow board Inc, company gets by merging with the smaller company is that it is able access the European Snowfun resources without having to purchase those resources. It does not require having extra capital to purchase the assets belonging to the other company. Acquisitions also results in the company having larger economies of scale and this results in greater profit margins.
Besides getting benefits on marketing, acquisition is a very convenient way for the company to grow. Fewer risks are involved compared to investing more in marketing and promoting sales. Nevertheless, this acquisition also comes with some undesirable impact on the Custom Snowboard Inc. It causes the shareholders of the big company such as the Custom Snowboard to lose their investments while those of the small company gain (Bruners, 2004)
A summary of the expansion and the potential returns that will arise from the Activity-based costing
The short-term trial on the personalized panted production in The U.S.A and Canada if it works out well can be a way of expanding the market resulting in a considerable market growth. This will result in increased sales returns giving the company a greater profit margin thereby making it compete well with other major players in the industry. Inclusion of personal painting on the product may either result in the increase in sales in the short term as people will be attached to the equipment. However over time, the people will get used to that change and will eventually get back to the normal less expensive products. There is a need for the company to come up with new innovations that incur fewer expenses and whose prices are similar to those of normal products and those which meet the contemporary consumer needs. The main aim of the company should, therefore, be meeting the consumers needs thereby avoiding losing them to their competitors. The idea of venturing into new markets by opening branches in other countries is, however, a wise move (Brooks & Brooks, 2010). This is because these other countries may offer cheaper production alternatives and larger markets. This increases the economy of scale of the company and is again reflected in increased profit margins.
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 full acquisition of the European SnowFun in order to allow for the commencement of 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. However, the company needs to carry out a conclusive research on the implication of the acquisition of the European SnowFun to ensure that it does not incur losses (Gaughan, 2010).
Any business company is bound to gain more efficiency in production coming from the increase in the economies of scale and operation diversification. However, there is the risk that if this subsidiaries fail, there will be spills avers that would be a risk to the country they operate in. Nevertheless, expansions across the borders are seen to incur far much less cost compared to development of subsidiary. This applied in the case of the Snow board company implies that the company will gain more by opening the new branch in other countries rather than merging with the European snow fun. This decision could ,however, be liquefied by the fact that in case the business fails, the presence of a subsidiary will take lesser costs that having a branch abroad. This then implies that the management need to keenly consider the financial stability and the efficiency benefits accrued to the policy that it decides to adapt (Brooks & Brooks, 2010).
To ensure financial stability, the company requires coming up with compatible international system to avoid risks that are avoidable. Having branches overseas also helps the company in maintaining flexibility and managing liquidity. It is also a way of providing a channel through which the company can reach large corporate customers. It also ensures there is centralization of management thereby harmonizing objective implementation. This is unlike where subsidies are formed and the many parts are under different managements.
Both types of expansions have their own advantages than disadvantages. However in the case of the Snowboard company inC, the best expansion option is opening up a branch and diversification of product (Gaughan, 2010). This decision is based on the company financial status and the nature of the business that it engages in. The funding from the bank should therefore have great profits if used in the opening up of branches in Canada and other parts of Europe.
Brooks, W. T., & Brooks, W. P. G. (2010). Playing bigger than you are: How to sell big accounts even if you’re David in a world of Goliaths. Hoboken, N.J: John Wiley & Sons.
Bruner, R. F. (2004). Applied mergers and acquisitions. Hoboken, N.J: John Wiley & Sons.
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.