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The following data relates to a company in the manufacturing sector in Kenya for the year ending 31 December 2019
The following data relates to a company in the manufacturing sector in Kenya for the year ending 31 December 2019. Kshs. "000" Sales 25,678 Total Assets 49,579 Total Liabilities 5,044 Retained Earnings 1,77 Working Capital -1,777 Earnings before Interest and Taxes 2,605 Market value of Equity 10,098 Book value of Total Liabilities 5,044 The company is paying interest on a long-term debt instrument amounting to Kshs. 905,000 per year and that the company's total liabilities is constituted in the ratio of 2:5 between current and non-current components. a. Using the Springate model assess the financial health of the company (3 Marks) b. Taking each variable above explain how the management of the above company can improve the financial health of this company
Expert Solution
Answer to Q no 1
| The springate model | ||||||
| Z = 1.03 A +3.07B+.66C+.4D | ||||||
| =1.03*-0.03584+3.07*0.052542+0.66*1.179619+0.4*0.517921 | ||||||
| 1.11010568 | ||||||
| A = Working Capital / Total Assets | ||||||
| B = EBIT/ Total Assets | ||||||
| C = EBT / Current Liabilities | ||||||
| D = Sales / Total Assets | ||||||
| Working Capital = -1777 | EBIT | 2605 | ||||
| Total Assets = 49579 | Less : Interest | 905 | ||||
| A =-1777/49579 | -0.03584 | |||||
| EBT | 1700 | |||||
| EBIT = 2605 | Total liabilities | 5044 | ||||
| Total Assets =49579 | Ratio | 02:05 | ||||
| B = 2605/49579 | 0.052542 | Current Liabilities | =2/7*5044 | |||
| 1441.143 | ||||||
| Sales = 25678 | ||||||
| Total Assets = 49579 | C = 1700/1441.143 | 1.179619 | ||||
| D = 25678/49579 | 0.517921 | |||||
The score is 1.11 which means the financial health is ok as the score is
Answer to Q no 2
Sales - Increasing Revenue is a sign of healthy financial health as sales growth is a primary factor in increasing profit
Total Assets - it determines the stability of the company - so increasing total assets is a good sign .
Total liabilities - it determines how much the company owns to outsiders , so decreasing liabilities is a good sign.
Retained Earnings - It determines the total savings and determines the stability and growth of the company.
Working Capital - it determines the operational efficiency of the company and ability to pay back the current liabilities . The ratio of current assets to current liabilities should be equal to 2.
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