Credit Worthiness for Black Gold Limited - Case Study Example

Report on credit worthiness for Black Gold limited Introduction The credit assessment of black gold limited has been concluded and the report provides a detail summary of the company’s business situation as well as the extent to which the company can be awarded loan. This report is realized after considering many factors that will lead to credit risk to the bank and thus the assessment provide a reliable information that can be relied upon in concluding on the credit worthiness of black gold limited. The bank is committed to maintain the client and moreover it is keen on ensuring that the bank does not incur huge credit risk consequential from the business situation. The credit worthiness of black gold limited provides an agreeable result and thus the business qualifies for loan subject to limitation. it can be observed form the analysis that the business is recovering from financial depression and the loan market base such as at 85% lending rate in order to cater for 15% business risk since the trend of the business is not constant and thus hard to forecast the precise future trend of the company situation and concluding on the amount of loan to be process.. Many factors were considered in understanding the business situation and risk as well as the historic trend of the business performance. As depict in the appendices below. The ration analysis such as the return on equity provides an increasing trending as compared to the financial year 2013.this imply therefore that the business can return investment in working capital by 30%.the capital and liquidity ratio of the company provides a decline capital asset ratio implying that the business is minimize the use of loan capital and thus the liquidity risk for the business is declining. The profitability ratio provides a declining then an increasing trend to year 2014 though very low as compared to the year 2012. The analysis of the black gold financial statement provides an information and understanding of the business situation and factors that hinder full loan processing. the business cannot qualify for a full loan of $5 billion since, the business trend provide a decline and increasing trend but quite below as compared to the performance of 2012.this pose a risk threat since the business trend is not consistent and consequently it will poses challenge and threats of risk such as loan default or restructuring of loan. Risk and return that the financial provides to the bank In understanding the credit worthiness of a customer, the bank considers some factors. The following are some of the factors that were considered in settling on extent of loan to be processed for the company. The financial history as well as the credit history of the company which as observed provide a decline and increasing trend but a slower pace. Analysis is made on the capacity. This was made on the capability of the company to earn more income so as to payback the loan. The financial statement of the business provides a recovering increase in net profit from the previous years. This will challenge the processor loan processing since, it can be observed that the business is recovering from a profit downfall and thus it is hard to forecast the business situation of the company this is hard to provide a 100% full loan since the business performance as depicted by the capacity provides a risky situation to the bank. The business can as well get loan since for the last preceding years then business has been generating a positive cash flow. The capital of the business was as well assessed. This is an important factor in concluding on the loan processing form. Capital is the asset of the business and may entail the machinery, equipment, and inventory. The bank takes into consideration capital but with some facilitation since if the black gold limited folds, they are left with assets, which are depreciated, and consequently they ought to find somewhere to dispose the asset at a liquidation worth and thus the cash of black Gold limited is considered necessary. Another factor that was deemed in ascertaining the credit worthiness of black gold limited is the collateral for loan. This is the cash and asset that a business will provide as a security in case of loan default. Other than having a good credit a proven capability of generating cash flow as well as the company’s asset, the bank will thus require that black gold limited to pledge their asset as collateral for loan in order to ensure that the business risk of loan default is accounted for by the company and not the bank. The essence of collateral by the business is that it will make the company more likely to work to keep the business running. Recommendation From the assessment of the company financial situation and other factors, it can be concluded that the business situation for black gold is recovering from a downfall. This is reflected from the financial statement. The recovery situation of the business some challenge in processing the credit worthiness of the company and thus it is hard to forecast the future trend of the business situation. In this regards the bank will provide loan to black gold limited subject to certain limitation in order to avoid credit risk. This therefore led to ascertaining the value at risk of the business. Value at risk is the statistical method employed to ascertain as well as quantify the level of financial risk within a company or investment portfolio for a period of time. Value at risk is therefore employed to measure as well as manage the risk level that black gold limited will assume. As a risk manager, our key duties is to make certain that risk are not taken beyond the level at which the company will absorb the loses of a feasible worst result. In ascertaining the value at risk of black gold limited it is measured in three variables; the value of probable loss, the likelihood of that amount of loss as well as the time. At 95% confidence level on the performance of black gold mine limited, it implies that the value there is 5% probability that the company will lose more than {5%*$5 billion=$250 million} in any given month. in this regards, a $250 million loss must be anticipated to occur once evrey20 months this amount of loss ($250 million) is huge given the fact that the business is depicting a recovery from downfall as per the 2012-2014 historical trend in the financial performance and thus this amount is huge to the commercial bank of Indonesia. The bank will therefore reconsider the value to be awarded to black gold limited as loan in order to minimize credit risk. The conclusion of the report is that, after a detailed analysis of the financial statement of black gold limited, the bank will reconsider the amount of loan requested since, the financial statement of the company provides a satisfactory evidence that the business cannot afford to repay the amount comfortably since, the business has been recovery from financial breakdown and consequently it will be hard to assume the credit worthiness of the business. This conclusion is arrived at after considering many factors such as the 95% confidence level that bank will be certain about the future performance of the business, the risk variance that the asset of the company will pose as well as the profitability ratio depicting the cash flow for the last three historic years and forecast the future trend of the cash flow generate by the business. Appendices Ascertaining the company strength and weakness Value at risk at 955 confidence level= {5%*5 billion=$250 million loss} A. Ration Analysis; capital and liquidly ratio Capital Asset ratio= {Book value of equity/Asset} Capital asset ratio= { 1200/90150=0.013 1200/9872=0.12 1200/100870=0.02 B. Risk variable ROE= {Earning/capital} 3062/81150=0.04 1830/78950=0.023 2590/83420=0.03 Profitability ratio Net profit margin= {net profit/sales} 3062/39352=0.08 1830/46990=0.04 2590/52750=0.05 The graphical trend of the company’s financial statement Understanding the credit risk for Black Gold Ltd 2012 2013 2014 Capita asset ratio 0.013 0.12 0.02 Return on equity 0.04 0.023 0.03 profitability ratio 0.08 0.04 0.05 Read More