Credit and Lending Decisions at 1300 Smiles Limited - Example

Finance and Accounting CREDIT AND LENDING DECISIONS Background Detail:- of the Borrower- 1300 Smiles Limited. Address-  Level 2, 25 King WilliamStreet, Adelaide SA 5000 (1300 smiles ltd, 2014). Directors- Robert Jones (Chairman) Dr. Daryl Holmes (Managing Director) William Bass (Non-Executive Director and Company Secretary) Number of Ordinary shares- 23700000 (ORD MINNETT, 2013). Market Capitalization- 164 million Australian Dollar. Top Five Share Holders- Name of the Shareholder Numbers of Shares held Ordinary Shares % of the total shares issued Dr. Daryl Holmes 14169237 59.84 JP Morgan Nom Aust Ltd 1068480 4.51 Evelin Inv PL 980000 4.14 National Nom LTD 604302 2.55 Kredithaus Pty Ltd 566000 2.39 Brief Overview of the facts of the deal:- 1300SMILES Limited wants to move their banking facilitieos to Excel Bank. The company also wants to borrow $6 million from the Excel Bank for following purposes- The company wants to borrow $4 million to purchase new equipments of dental. They want to borrow $1 million for purchasing the additional offices (which is valued at $2 million). $1 million they to borrow for the facility of overdraft. It has been stated that the company has repaid all the debts of their existing bank and they want to move all their banking facilities to Excel Bank. The Company will not have any facilities with the existing bank. As the technology is getting advanced in the dental industry thus the company requires $4 million to modernize the existing equipments to ensure their leadership position in the dental industry. The additional office is required for further expansion of the company. The overdraft facility is required to fulfill the ongoing cash flow needs in the business. The company wants to move the banking facilities to Excel Bank as the bank has got a good reputation for excellent customer service and expertise in banking industry. Overview of the Company:- Dr. Daryl Holmes is the Founder and he is also the managing director of 1300 SMILES Limited. The company is registered on the Australian Stock Exchange since the year 2005. The company operates in the dental industry and provides full dental facilities at its clinics which are situated in the ten major population centers in Adelaide, Queensland and South Australia. The company is also seeking to expand its operation through the geographical area of Australia and it is expanding by acquiring existing dental practices and by establishing own new centers of operations. The main corporate and administrative offices are in Townsville. Dr. Holmes started his career as dental officer in the RAAF but before starting own practices in the rural area of Burdekin towns of Home Hill and Ayr. After twenty years his vision was grown from small rural dental practice to a million dollar enterprise in the east coast of Australia and the area is from Queensland to South Australia. The company always supports their employees through the process of on-the –job training and sponsored training which helps them to achieve excellence in their field. The company also supports many local cultural and sports events from Tweed Heads on the boarder of NSW. The company also has associated with the North Queensland Cowboys Rugby League team (1300 Smiles, 2014). Industry Analysis:- The dental service industry in Australia supplies products, services and equipments to the dentists and associated with oral healthcare professionals who are employed in both government and private health organizations. Good progress has been made in the past few decades in the dental industry of Australia. Understanding ahs also improved related to oral diseases like gum diseases and tooth decay which has helped to make the way for further expansion of the dental service industry in Australia. The age and growth of the population and their retaining in natural teeth are the main factors of general dental services which include preventive, diagnostic and restorative services. The Dental industry has generated $9 billion in the financial of 2013 and the annual growth rate of 2.7%. It has employed more than 40009 employees. The industry is expected to grow by 3.1% in the financial year of 2013-14. The industry provides various products like preventive and diagnostic services, Restorative services, specialist service and Prosthodontics services. The industry is associated with various activities like Conservative dentistry, Dental surgery, Endonotistry, Oral pathology, Orthodontistry, Oral surgery, Dental operation, Prosthodonistry and Periodontistry. (IBIS world, 2014). Financial Analysis:- Highlights of financial performance of the financial year ended 30 June 2013- Statutory revenue slightly declined by 1.3% to $36.2 million. Net Profit after Tax has grown by 3.1% to $6.4 million. Retained Profit has increased by 17% to $12.5 million. Net Profit before Tax has also increased by 2.1% to $8.9 million. Earning per Share has improved by 1.1% to 26.9c. OTC revenue has increased by 5.4% to $48.5 million. Dividend per share has increased by 3.9% to 18.5c per share (1300 SMILES, 2013). Source: (1300 SMILES, 2014) From the above chart we can see that the Net profit after Tax of the company has improved over the years. Ratio Analysis:- Particulars 2012 2013 Gross Profit Margin 36.78 37.85 Operating Ratio 11.44 12.71 Net Profit Margin 16.89 17.68 Inventory Turnover Ratio N.A. N.A. Debtors Turnover Ratio 3.98 8.07 Creditors Turnover Ratio 16.91 17.14 Current Ratio 1.16 1.70 Quick Ratio 1.16 1.70 Return on Equity 23.85 22.86 Return on Capital Employed 35.50 31.71 Gearing Ratio 0.76 2.44 Earnings Per Share 0.26 0.27 From the above table we can see that the short term liquidity position of the company has improved over the years as the current ratio has improved from the year 2012 to 2013. But the return on equity has slightly decreased to 22.86 and it indicates that a company has earned with compare to total equity on balance sheet as compared to the year 2012. Return on Capital employed has also decreased in 2013 to 31.71 and it indicates the profitability and effectiveness of the company has reduced in case of generating revenues over the amount of capital invested. From the profitability position and business performance it can be seen that the company has good profitability position as the gross profit margin of the company has increased to 37.85% in 2013 and net profit margin has also increased to 12.71% in 2013. It indicates that company is more efficient than previous and company is also efficient enough at converting sales into profit. The debtor’s turnover ratio has improved than the previous year at approx 8 days and the creditor’s turnover ratio at approx 18 days. It indicates that the company is efficient in collecting its receivables from the debtors and at the same time it is also efficient in paying off debt to its creditors. Gross Profit Margin Gross profit margin shows the percentage by which gross profit has exceeded cost of production. It measures that how well a business can control its costs. Investors also use this ratio to decide whether it is most profitable to invest or not. Higher gross profit means that the company is more efficient (Barry, 2010, p. 135). Operating Ratio Operating ratio shows the relationship between the operating expenses done by the company and the total sales revenue of the company. Net Profit Margin This ratio indicates the amount of sales is remaining after paying all expenses. It is an important ratio which should be considered while making investment. Higher net profit indicates that a company is efficient enough at converting sales into profit (Thukaram, 2007, p.99). Debtor’s Turnover Ratio Debtor’s turnover ratio shows how much the company is efficient to collect its receivables from its debtors. Creditor’s Turnover Ratio Creditor’s Turnover Ratio shows that how fast the company is paying off its debt. Current Ratio It can also be called as working capital ratio. It shows the financial performance of company’s liquidity. The ideal current ratio is 2:1. But for some industries it can be 1.5 ( Mittal,2011,p.53). Quick Ratio It is also known as acid test ratio. It can be calculated as (current assets- inventory)/ current liabilities. It defines the short term liquidity capacity of a company (Public.asu, No Date). As the company ahs no inventory thus the quick ratio is same as the current ratio. Return on Capital Employed ROCE helps to measure the return of a business earned by capital employed. It measures the profitability and effectiveness of the company to generate revenues over the amount of capital invested. Return on Equity It determines the amount of net income over the amount of equity shareholders. It shows the profit that a company has earned with compare to total equity on balance sheet. Gearing Ratio It measures the financial leverage of the company. It shows the degree to which the company’s operations are funded by the owner’s funds versus the borrowed funds. Earning Per Share The ratio is calculated by- earnings available to equity shareholders/no of outstanding shares. It shows that shareholder’s earning per share. Strength and weakness of the Company:- Strengths Strengths of a particular company depend upon the strategies that they are following. In the era of competition a company should aim at achieving a suitable position in the industry it is operating. Similarly ORD MINNET has increased its strengths by certain ways. The company has a clear corporate vision and strategies. It has established itself in the corporate world by clearing its vision following the business strategies. It has a management with a track record of adding shareholder value. Increased cash flow has increased their earnings which have resulted into the growth of operating cash flow and dividends. Majority shareholder is founder, Managing Director and fellow practicing dentist. Hence, it has also given lots of opportunities to the preference shareholders. Generally in a growing area if a new company establishes then it adds value to the economy. The company has generated its practices in growing regional areas where the demand exceeded the supply. Hence, it resulted into more profit generation (ORD MINNETT, 2013). Weaknesses A company’s weakness is generally driven by internal and external discrepancies. Internal risks can be mitigated but external risks are not in the hands of the company. Certain factors are responsible for its weakness. Changes in Economy highly drive a company towards either in negative direction or in positive direction. Changes in government policies have affected its growth. Mitigation- the company should be stable in its position to avoid any uncertain situation of economic changes. It should focus on strengthen its financial performances. Majority of the shareholders were the internal people like managing director, founder, etc. who were aware about its all time report and restricted their investments during the down phases of the company. Hence, it highly affected its profit from the shares. Mitigation- the company should invest heavily in their operations to improve the profitability position and cash flow of the company. The company highly relied on its new and existing patients. But public had a perception that regular dentistry is not affordable. That’s why they restricted their frequent visits which affected its revenues. Mitigation- the company should lower the price level of the services they are providing to their customers in order to attract patients for regular dental checkups. One of the main reasons of weakness is due to the competitors in the market. Other dental practices were established resulting into its increase in competition. Mitigation- the company should differentiate its products and services to win over its competitors. It created more opportunities for the dentists. Hence, many of them switched over to other companies. So, the company lost many dentists. Mitigation- the company should invest heavily for the benefits of the employees and should provide them many facilities to retain them in the company. In this situation in order to retain them, company had to overpay them and it also had to introduce new practices, so that it can retain its good position in the market. It resulted into increase in operating cost (ORD MINNETT, 2013). Mitigation- instead of higher payment the company should provide other beneficial facilities like health benefits, refreshments, travelling facilities, holiday packages. Recommendation:- 1300 SMILES Limited was established in 2002 and has a rich experience of 12 years in Dental Industry. It has expanded in various locations in Australia and is planning to expand more. The company has very clear vision and well formed strategies which help it to achieve success in the industry. It is very well known brand among people and is performing its business with full efficiency. It can be seen that liquidity position of the company has improved over the years as the current ratio has improved from the year 2012 to 2013. It indicates that company can pay out any short term liquidity crisis. But the overall long term solvency position of the company is not very good. The company also has a strong profitability position and goodwill among customers and suppliers in the market. Thus considering the liquidity position, profitability position, strengths & weakness and mitigation of weaknesses it can be said Excel Bank can accept 1300 SMILES Limited as their new customer and should lend $6 million to the company immediately. References Barry. (2010). Introductory Financial Accounting And Reporting. USA : McGraw-Hill International. Thukaram, R. (2007). Management Accounting. New Delhi: New Age International. Mittal, R. (2011). Management Accounting and Financial Management. New Delhi: Vaibhav Printers. Public.asu.,( No Date). Ratio Analysis. Retrieved from: http://www.public.asu.edu/~bac524/liquidity_ratios.pdf. IBIS World. (2014). Dental Services in Australia: Market Research Report. Retrieved from: http://www.ibisworld.com.au/industry/default.aspx?indid=613. 1300 SMILES Limited. (2013). ANNUAL REPORT For the year ended 30 June 2013. Retrieved from: https://www.1300smiles.com.au/wp-content/uploads/2013/09/1300SMILES-Ltd-Annual-Report-FY13.pdf. 1300 SMILES Limited. (2014). About Us. Retrieved from: https://www.1300smiles.com.au/about-us/. ORD MINNETT. (2013). 1300SMILES Corporate Activity – Dental Partners. Retrieved from: https://www.1300smiles.com.au/wp-content/uploads/2013/11/ONT_021013.pdf. Appendices 1 Income Statement as of 30 June 2013 Currency in 30-Jun 30-Jun Millions of Australian Dollars 2012 2013   Restated AUD   AUD   Revenues 36.7 36.2 Other Revenues 0 0 TOTAL REVENUES 36.7 36.2 Cost Of Goods Sold 23.1 22.5 GROSS PROFIT 13.5 13.7 Selling General & Admin Expenses, Total 2.5 2.5 Depreciation & Amortization, Total 1.8 2.1 OTHER OPERATING EXPENSES, TOTAL 4.2 4.6 OPERATING INCOME 9.3 9.1 Interest Expense -0.5 -0.1 NET INTEREST EXPENSE -0.5 -0.1 Income (Loss) On Equity Investments -- 0 EBT, EXCLUDING UNUSUAL ITEMS 8.8 9 Merger & Restructuring Charges 0 0 Impairment Of Goodwill -- -- Gain (Loss) On Sale Of Assets -- -- Other Unusual Items, Total -- -- Insurance Settlements -- -- EBT, INCLUDING UNUSUAL ITEMS 8.8 8.9 Income Tax Expense 2.6 2.6 Earnings From Continuing Operations 6.2 6.4 NET INCOME 6.2 6.4 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 6.2 6.4 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 6.2 6.4 Balance Sheet Currency in 30-Jun 30-Jun Millions of Australian Dollars 2012 2013   Restated AUD   AUD   Assets     Cash And Equivalents 13.5 8.1 TOTAL CASH AND SHORT TERM INVESTMENTS 13.5 8.1 Accounts Receivable 0.4 0.8 TOTAL RECEIVABLES 0.4 0.8 Prepaid Expenses 0.2 0.1 Other Current Assets 0.2 0.1 TOTAL CURRENT ASSETS 14.2 9 Gross Property Plant And Equipment 14.8 15.6 Accumulated Depreciation -5.1 -6.9 NET PROPERTY PLANT AND EQUIPMENT 9.7 8.7 Goodwill 11.1 11.8 Long-Term Investments 0 0.3 Loans Receivable, Long Term 1.7 1.8 Deferred Tax Assets, Long Term 0.6 0.5 Other Intangibles 1.1 1.5 Other Long-Term Assets 0 0 TOTAL ASSETS 38.5 33.8       LIABILITIES & EQUITY     Accounts Payable 1.7 1.7 Accrued Expenses 0 0 Current Portion Of Long-Term Debt/Capital Lease 7.5 -- Current Portion Of Capital Lease Obligations -- -- Current Income Taxes Payable 0.5 0.9 Other Current Liabilities, Total 2.5 2.2 Unearned Revenue, Current -- 0.4 TOTAL CURRENT LIABILITIES 12.2 5.3 Long-Term Debt -- -- Pension & Other Post-Retirement Benefits 0 0.1 Other Non-Current Liabilities 0.2 0.6 TOTAL LIABILITIES 12.5 5.9 Common Stock 15.4 15.5 Retained Earnings 10.6 12.5 TOTAL COMMON EQUITY 26 28 TOTAL EQUITY 26 28 TOTAL LIABILITIES AND EQUITY 38.5 33.8 Short term Liquidity- The short term liquidity position of the company has improved over the years as the current ratio has improved from the year 2012 to 2013. The current ratio in 2012 was 1.16 and in 2013 it is 1.70. Thus it can be said that the liquidity position of the company has improved over time. The total current assets of the company in 2012 were 14.2 million AUD and in 2013 it is 9 million AUD. The current liabilities of the company were 12.2 million AUD in 2012 and in 2013 it was 5.3 million. Thus as the currents assets have decreased, current liabilities have also decreased which resulted into an increase in current ratio over the years. Thus it can be said that the company has good liquidity position to face any liquidity crunch. Long Term Solvency:- The net profit of the company was 6.2 million AUD in 2012 and it has increased to 6.4 million AUD in 2013. The retained earnings of the company have also increased to 12.5 million AUD from 10.6 million AUD in 2013. It will be used for further expansion of the business. Gearing Ratio 0.76 2.44 Gearing ratio of the company has increased over the years which show that the company is more relying on the external borrowings than the owner’s equity. But as stated in the case, the company has already repaid all the debts to its previous banks thus it can be said that now the company has no more debts with it. Debt Equity Ratio 0.01 0.03 Other long term solvency ratios like debt equity ratio shows that the company has very low long term debts in it. The overall long term solvency position of the company is not very good. But it can be said that as the company has already repaid all its existing debt to the previous bank thus it can be said that there is no risky position if a new bank lends to it. Business Performance:- From the profitability position and business performance it can be seen that the company has good profitability position as the gross profit margin of the company has increased to 37.85% in 2013 and net profit margin has also increased to 12.71% in 2013. It indicates that company is more efficient than previous and company is also efficient enough at converting sales into profit. The debtor’s turnover ratio has improved than the previous year at approx 8 days and the creditor’s turnover ratio at approx 18 days. It indicates that the company is efficient in collecting its receivables from the debtors and at the same time it is also efficient in paying off debt to its creditors. The sales revenue of the company has slightly decreased from 36.7 million AUD to 36.2 million AUD in 2013. But the gross profit of the company has increased from 13.5 million AUD to 13.7 million AUD in 2013. It shows that the profitability of the company has increased over the years. Beside this the company also has good position in collecting receivables and in paying debts which indicates that the company will not fail to repay the loan of Excel bank. Appendix 3 Cash Flow Statement Currency in 30-Jun 30-Jun Millions of Australian Dollars 2012 2013   Restated AUD   AUD   NET INCOME 6.2 6.4 Depreciation & Amortization 1.7 2 Amortization Of Goodwill And Intangible Assets 0.1 0.2 DEPRECIATION & AMORTIZATION, TOTAL 1.8 2.1 (Gain) Loss From Sale Of Asset -- -- (Gain) Loss On Sale Of Investment -- -- Asset Write-down & Restructuring Costs -- -- (Income) Loss On Equity Investments -- 0 Change In Accounts Receivable 0.7 -0.5 Change In Accounts Payable 1 -0.2 Change In Income Taxes 0.1 0.4 Change In Deferred Taxes -0.2 0.2 Change In Other Working Capital 0.2 0.2 CASH FROM OPERATIONS 9.8 8.6 Capital Expenditure -2.6 -0.7 Sale Of Property, Plant, And Equipment -- -- Cash Acquisitions -1.5 -0.6 Sale (Purchase) Of Intangible Assets -0.9 -0.5 CASH FROM INVESTING -5.1 -1.9 Long-Term Debt Issued -- -- TOTAL DEBT ISSUED -- -- Long Term Debt Repaid -- -7.6 TOTAL DEBT REPAID -- -7.6 Issuance Of Common Stock 8.3 -- Repurchase Of Common Stock -- -- Common Dividends Paid -3.7 -4.6 TOTAL DIVIDEND PAID -3.7 -4.6 Other Financing Activities -0.4 -- CASH FROM FINANCING 4.1 -12.2 NET CHANGE IN CASH 8.8 -5.4 From the above cash flow statement it can be seen that depreciation and amortization of the company has increased and cash from operations has decreased over the years. It indicates that the company has earned less from its operating activities. Cash from investing activities are negative for both the years but still it has improved in the year 2013. Cash from financing activities has decreased severely in 2013 as it has earned negative amount of cash from investing activities. The net change in cash is also negative for the year 2013 which indicates the company has no cash with it and it should be improved immediately to increase the overall performance of the company. Read More