Garry Halper Meswear Limited: A loan request for an export order Case Study Solution
Gross Profit Margin:
The gross profit margins show the financial health of the company after deducting the cost of goods sold from sales. The company’s gross profit margin shows an increasing trend from the fiscal year 2009 to 2012. GHM gross profit margin was 16% and 19% in the fiscal year 2009 and 2012 respectively. The increasing trend in gross profit margins shows that the company is efficiently using its cost and generating its profit from the sales. However, according to the pro forma analysis, the company gross profit margin would be 16%. Although the sales of the company would almost double in 2013 it would lead to an increase its cost of goods sold as well.
Net Profit margin:
Net profit margins show that how much profit the company earns after paying all the expenses which include operating expenses, interest and tax expenses. It shows the overall performance of the company. The company’s net profit margin was 1% to 2% during the fiscal year 2009 to 2012. The company is spending a very huge amount on its expenses. However, after expansion, the GHM’s net profit margin would be 5% which indicates that the company would earn better profits in comparison with previous years.
Return on Equity:
Return on equity is one of the profitability ratios which shows that how much return the shareholders get for the money invested in the company.The return on equity was decreasing each year from 2009 to 2012. ROE indicates that the company is not efficient in generating profits. However, in the fiscal year 2013, the estimated ROE would be 50% which that the company would run its operations efficiently and effectively which would lead to an increase in its net income.
Liquidity Ratios:
The liquidity ratios show the company’s ability to convert its assets into cash or how efficiently the company cashes its assets. It shows the company’s ability to pay off its debts. The working capital ratios have been calculated in order to measure GHM’s ability to convert its assets into cash.
Working Capital Ratio:
The working capital ratio shows the short term liquidity position of the company. In other words, it shows the company’s ability to pay off its current debts (current liabilities). The working capital ratio of GHM, during 2009 was 1.663 however, during 2012 the current ratio of the company decreases slightly and reaches 1.485. The current ratio shows that the company is in a strong position to pay off its current liabilities by using current assets. The company has more assets in comparison with its liabilities. However, the net working capital ratio in the fiscal year 2013 would be 1.592 which also indicates that the company would have sufficient assets to pay off its current liabilities.
Solvency Ratios:
The solvency ratio shows the portion of the debt in the company’s assets and equity. It also shows the company’s ability to meet its debt obligations. The Debt-to-Asset and Debt-to-Equity ratio has been calculated in order to identify the company’s ability to pay off its debt obligations.
Debt-to-Equity:
Debt-to-Equity shows that how much the portion of the debt is included in overall investment. The company’s debt to equity ratio was 4.344 in 2009 which increased to 6.271 in the fiscal year 2011. However, in the fiscal year 2012, the debt to equity ratio decrease and reaches 4.042 which indicates that the company raises most of the financing through debt. GHM’s debt to equity ratio is very high which shows that risk potential is high in this business. Therefore, the investors of the company would consider the company risky. Moreover, in 2013, the debt to equity ratio would be 2.588. Although it is almost half of the previous year’s debt to equity, for investors it is very risky to invest in this company.
Debt-to-Asset:
The debt to asset ratio shows how much the company assets are financed by the debt. The debt to asset ratio Inditex during 2009 was 0.813 while it has reduced to 0.785 during 2010. However, it remained constant in 2011 and 2012. The debt to asset shows that 8% of the company’s assets are financed by the debt. The lower debt to asset ratio shows that the company has a small burden of debt in comparison with its assets. As the debt to asset ratio of the company is less than 1 which indicates that the company has the potential to pay off its liabilities.
The decision as a Confederation Bank
On the basis of the above analysis, as a confederation bank, I would invest in the company because the company has the potential to grow and it has sufficient assets to pay off its liabilities. Although the debt to equity ratio is very high the company has sufficient assets to pay off its liability. The working capital need of the company is $531600 which in between the range therefore, the bank would provide funds to the company on the basis of terms and condition which includes the company would have to keep their assets as collateral. As it is a sole proprietorship company and debt to equity ratio is also very high which indicates higher risk. Therefore, in order to get financing, the company would have to keep its assets as collateral.
Suggested Solutions
The loan from Financial Institutions
The company could borrow money from financial institutions in order to fulfill its working capital requirement. The major advantage of borrowing money from a financial institution is that it provides a higher amount of loan in comparison with other fund providers. Furthermore, financial institutions do not interfere with the operations of the business. However, the company must have sufficient assets to pay off its liabilities. Moreover, the company would be obliged to pay interest expense each year whether the company is generating profit or not.
Joint Venture
The company could include any other potential investor for this specific task. Through the joint venture, the company’s working capital needs would fulfill however, the company would have to share its profit of the company. Moreover, the company would have to bear the interference of the investor that seems to be difficult as it is a sole proprietorship company.
Angel Investor
The company could raise funds by taking financing from angel investors. One of the biggest advantages of an angel investor is that, if the company fails to achieve profit, it does not have to pay back to the investor. Moreover, angel investors ask for less rate of return in comparison with other investors. However, the major disadvantage of taking a loan from an angel investor is that the management has to lose its control in the business. Furthermore, angel investors provide a minimal amount of funds.
Recommendation
On the basis of the above analysis, it could be said that in order to increase working capital or fulfill the requirement of working capital, the company is suggested to borrow money from financial institutions because it is an only alternative solution that would provide a huge amount of funds. Moreover, financial institutions do not interfere with the operations of the business. However, the company would have to pay interest expense whether the company is earning a profit or not. Furthermore, other financing alternatives which include angel investors and the joint venture could not be a feasible option for the company because these fund providers tend to interfere in the operations of the business.
Conclusion
Garry Halper Menswear Limited has to increase its working capital in order to complete a big order which has been given by a large department store of the United States. The company wants to raise funds through borrowing. Therefore, the company is suggested to raise borrow from financial institutions in order to fulfill its requirements and to expand its business in the United States…………
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