Credit Analysis for Auto Spare Parts Company Essay

Published: 2021-06-29 01:49:49
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As per our interviews with “Zamia Company” & “Hussein rarer Company’, these companies helped us in our assessment of the SPIT managerial performance and for industry and market risk. Industry risk: We begin first by assessing the industry risk as it has its pros and cons as every other industry.
Pros: ; Auto spare parts are not of a perishable nature and can be stored under regular conditions ; Different range of prices from the cheap non-original Chinese to the original parts ; Different sources and countries to get the products ; It’s a necessity product if you own a car ; High profit margin in the retail sector and especially in the used spare parts ; The presence of new models and new technology ; Customer loyalty is heavily present in this kind of business Cons: ; Shipping cost and different currencies Large number of dealers ; Requires huge warehouses ; Marketing and advertisement are not involved ; Word Of mouth in Lebanon could highly affect a store’s reputation Probability of outdated inventory because of the new coming car models Market Industry fragmentation: The market is not dominated by single players or monopolist, but its highly shared by many suppliers for the time being.
This division is due to the diversity of sources and countries that are involved in such kind of industry Cyclical: This kind Of industry is a bit cyclical where it rises in the summer especially With he incoming of the tourists where car rental experience a high boost during this period thus resulting in car accidents or malfunctioning Of the cars. Its worth mentioning that this sector is elastic with the economy behavior. Competitors: 1. There’s no main competitor in this kind of business but some illegal small stores that doesn’t pay taxes or rents could act as competitors for the legal stores. 2. Suppliers that imports from china, turkey, Taiwan and other countries could beat the prices of the original European or Japanese spare parts, 3.
Chinese products having very low prices at nearly the same quality and design omitting with the original products. 4. The exclusive agencies are one of the most competitors especially tort the new spare parts. Macroeconomic trends: l. Political circumstances highly affected the industry negatively by lowering the purchasing power of individuals 2. Since this kind of industry is highly involved in trade and import/export, currency fluctuation would affect it, 3. Interest rates could also affect borrowers by encouraging or discouraging them to import from abroad 4_ Licensing allows only sole agents to deal with a specific trademark in one market.
Compass risk: I) Pros: ) The company is operating for more than 35 years allowing it to build strong relationships with many key suppliers and customers and strong foothold in the market b) Is engaged only in new and original products targeting middle/ high class social society c) The company has its loyal customers that feel comfortable and prefer dealing with it d) Entity has continuity where the sons inherited the business from their father e) Subject is a well organized company having NON warehouses, a good number of staff and specialized managers. 2) Cons: a) Highly indebted b) The company isn’t involved in Chinese products that are invading the market ND targeting mid and lower-class people. Evaluation of the management: The Spare Parts Import & Trade co. Management is operating under an effective strategy, the company is able to compete with its competitors due to its high managerial capabilities, where each to the tour managers is specialized in a specific domain and working in a professional manner. They also have a strong relationship with many key suppliers and customers in addition to a strong foothold in the market. Not to forget the company’s good name in the market and long experience which plays a role in attracting new customers. As for their legislation with banks it is not up to the companies achievements in sales and profits. The company has three ever green Joys with three different banks but this doesn’t mean that it is having financial problems, thus they must work more on decreasing their leverage value through their profits.
As for receivables the management is dealing with 200 small clients avoiding and minimizing the risk of concentrating its receivable in few large clients. The compass account payable shows that the company deals with suppliers through transfers and not Sac’s which reflects the trustworthy of suppliers and strong supplier-company legislation but in the Other hand it’s a risky way to make transfers with a foreign country. Regarding inventory the allocation of the “mechanical” and “body” spare parts to 65% & 35% is appropriate. As for the allocation Of European, Japanese and Korean cars should be adjusted as shown in the table below for economic and market reasons.
Most people shifted from European cars to Japanese because they are cheaper and have spare cars cost, while others shifted to Korean cars which are even cheaper than Japanese but with less durability. But still each car brand has its market and loyal customers. They should also expand o other brands that are highly demanded in the market like Ionians, Peugeot and People. The company has high cost of labor and should make some adjustments like decreasing number of employees in some sections like marketing, clerks and book keeping and increase the number in delivery drivers, Labor cost and numbers must be adjusted as shown in the table below to be more efficient and decrease the cost of labor from MM to MM.
The will to expand to a new line of services or business is a good idea that can give them extra profits after doing the necessary research and forecast to choose the appropriate one, I Origin European I Japanese I Korean I Occupation I Market Salaries Allocation I Adjusted 120% I # Of employees Of employees needed Company’s Adjusted Salaries I I I Sales & Marketing 15 I Salaries keepers Drivers 7*500 2*350 15*1500 12*1500 I Clerks 18 14 I I Office Boys 1522. MM | 10*1000 13 12 I Iota MM 12002 I Sales Very good sales growth 18+1000 14*500 I Book. 13*600 Financial Assessment: TYPE (Amounts in SOC $ ) Remarks 6,320 11,500 goods sold | 2003 15,750 7,250 | 1,500 122 12004 Sales Grown Across Profit 13,550 I Gross Profit Margin Boost of profit margin due to the I I lowering of cost of 22. 7% 46, on Equity 11,710 I .NET Profit 22. 5% 114%
Net Profit Margin 177% improvement due to the increase I loft net profit Receivables I I Return Big 1670 11,300 year but 1950 11,200 Representing between 11 and 12% of I I Sales 11,350 I Inventory 163% increase from previous still in a good position representing I 125% of sales Il,oho 11,450 I I Trade Payable Bank Debt Increasing proportionally with sales 1810 11. XX 1260 Reworking Capital I receivable & 180 1720 11,100 11. XX Healthy showing an expansion of the I company I Current Ratio 11. XX Greater than 1 since current assets current liabilities I Quick Ratio 10. XX are greater than 10. XX o_sax 1. XX | 105 I Acceptable al. Ox 0. XX | 141 I ‘Debt/ Equity (Leverage) Sight decrease but still insufficient Days Inventory Days Receivables cash flow sales: I Turn over rate is 2. 58.
Good I I I Negative Days Payable During the past 3 years, SPIT experienced a straight increase in its sales (10% and 15 due to the fact that the company is expanding its business by purchasing a new warehouse, thus increasing its sales and inventory. Profitability: Year 2004 showed an incredible jump in the percentages where gross profit doubled and net profit was multiplied by 8 due to many reasons: l. The SPIT bought a new warehouse during this year and increased its inventory by 63% to e able to meet the demand of its clients thus increasing its sales and profits. 2. Years 2003, 2004 showed an increase in sales but only year 2003 showed an increase in COGS while year 2004 show a contrary track by decreasing by 21% because SPIT could have found cheaper sources for its purchases. Cheaper sources could be: a.
A new supplier that have cheaper prices than the old one where they used to ship from. B. A big discount because they bought huge quantity)h c. A shift from original spare parts into non-original spare parts or Chinese products. 3. Company having a good management team avian a good control over its expenses increasing at an acceptable rate in front of the increase of sales. As for the interest expense, the rate of the gross interest expense is 13. XX during year NON increasing by 4. 35 times from year 2003 as for the net interest expense is 8. XX in year 2004 while it was 3. XX during year 2003 showing a big improvement. These ratios can reflect an excellent coverage position for the company to its interest expenses.
Receivables: Receivable are still at a constant rate ranging between 11% and 12% of sales which is very good rate regarding the nature of this business especially that he company is a whole sale one, Add on, Days Receivables is 48 which is also acceptable. Inventory: Lately, Inventory increased by 63% because of the presence of the new warehouse which needs to be filled by new spare parts, Days Inventory is currently 141 increasing by resulting in an increase of turnover rate 2. XX which is still acceptable visa-;-IIS the new expansion of the business. This increase is the result of the new warehouse where inventory presents a greater volume then before thus needs time to be evacuated. Current and quick ratios: Current ratios are maintaining nearly constant rates (I . SAX, I . XX and I . X) greater than 1 which reflects an acceptable asset management and worthiness of the company. While quick ratios also maintain constant rates (0. XX, 0. XX and 0. XX) representing an acceptable liquidity position of the company. Current liabilities: Bank debts showed an increase of debts of due to the fact that company expanded its business and bought a new warehouse. Also account payable showed an increase of 122% due to the same reasons mentioned previously, As tort bank facilities overdraft facilities are almost exhausted because partners used these facilities to purchase new inventory for their new warehouse and also because they are making wire transfers to some of their suppliers instead of using Less.
We can add also that lately USED MM of the retained earnings are added up to the capital to strengthen up the compass financial position. By time and if company continues with this rate of growth and expansion it can easily decrease its debts. Taking a look to the leverage ratio, we can see that its decreasing but at slow rate decreasing from I. I X to C. XX which is still unacceptable. Security: Our present security is the personal guarantee of the partners whose total net- Roth exceeds LIST MM Which is covering more than double Of their bank debt. The personal guarantee in our case is more than enough due to the fact that the company has been operating for more than AS years in the market giving it the know-how to continue and to be a leader.
Future Plans: SPIT is being offered 2 different plans by establishing a new joint-venture in Eastern Europe or opening a new garage for auto maintenance. For both of them we need to assess the choices and pick one of them or suggest a third choice that can best fit the company: For the first plan it has its advantages and disadvantages: 1. Pros: a. Being AS years operating in the Lebanese market, the company needs a new market because the local one is almost saturated. B. The Eastern European market is a promising one after the transformation of the political c. Opening a joint-venture with an established company there can be regime. A good catch. D. Earning an additional profit e. Earning a whole new experience by discovering a new market. F. Expanding its network and its social connections. _ Lebanon isn’t a safe and stable country to invest and expand in. 2. Cons: a. Entering a Whole new market isn’t so easy to adapt With (taxation, currency, security, mafias… B. Many Legal issues can face the SPITS while opening their new branch c. The import/export system is different than the Lebanese one that can make major problems d. Their financial status and bank debt doesn’t permit to initiate a new costly project like this one. At the end this plan isn’t the best one because it’s a big jump for a relatively medium local size company. Before traveling to Eastern Europe, SPIT should open in regional countries like Syria, Jordan, and Egypt before going worldwide.
For the second plan which is opening a garage for auto maintenance it has its advantages and disadvantages: pros: It is a complementary business to spare parts ; Exploring a new domain ; It’s a necessity kind of business ; Low operating cost after buying equipments ; Help them market their products ; Get feedback from customers about What products are more demanded and convenient Cons: ; High cost Of equipments needed to open a garage ; High amount of garages in Lebanon ; Customers are loyal to their garages ; Recruit new employees with no previous experience of the recruitment process ; Not specialized in car maintenance Opening a car maintenance garage is a good idea that is complementary o spare parts business but it needs specialty.
It also needs high budget to buy equipments, machinery and computers The company needs to recruit employees “mechanics” with good experience which needs time. Recommend them to open a small garage as a start and after two to three years if it Vass profitable they can expand having in hand good experience, name in market and their own customers. As a third best choice, I recommend SPIT to open a new sister company having a different name where it could sell used parts or non-original parts having a greater profit margin or it could open some retail stores that have also high profit raging. Those 2 plans don’t need big capital to initiate them and the SPIT could use its experience and social connections to make those plans a successful ones.
Conclusion: As a credit officer am satisfied with the company’s managerial and financial performance and especially for the recent ones having a straight growth rate and big experience in its pocket with some changes in the management mentioned above, As a banker see this company is rated as a good one and I would like to be the sole banker and take the whole risk because this company is a profitable en where it is using different kinds of facilities from overdraft to L/CSS to term loans. Also can benefit from the domestication of its employees where they can earn me extra money. I could also increase its facilities to finance one of the successful projects mentioned above after it decrease it debts a bit this is because SPIT’s management is a wise one and proved that along the years but I still fear if the family have a fight a split the company into 4 parts where each brother takes a part As for the Personal Guarantee will keep using it but I will add fire insurances for the current warehouses and for the future ones.

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