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Homework answers / question archive / He following data relates to a company in the manufacturing sector in Kenya for the year ending 31 December 2019

He following data relates to a company in the manufacturing sector in Kenya for the year ending 31 December 2019

Finance

He 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.
Using the Springate model assess the financial health of the company
                                                                                                            (3 Marks)
Taking each variable above explain how the management of the above company can improve the financial health of this company   

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As per the given scenario,

S. No Particulars Amount (in Kshs.)
1 Sales 25678000
2 Total Assets 49579000
3 Total Liability 5044000
4 Retail Earnings 177000
5 Working Capital -1777000
6 EBIT 2605000
7 MV of Equity 10098000
8 BV of Total Liability 5044000

Profit before Tax = EBIT - Interest = 2605000 - 905000 = 1700000

Current Liability = Total Liability x 2/7 = 5044000 x 2/7 = 1441143

Non Current Liability = Total Liability x 5/7 = 5044000 x 5/7 = 3602857

Springate Model Formula.

Z = 1.03A + 3.07B + 0.66C + 0.4D

A = Working Capital / Total Assets = -1777000/49579000 = -0.03584

B = EBIT / Total Assets = 2605000/49579000 = 0.05254

C = EBT / Current Liability = 1700000/1441143 = 1.17961

D = Sales / Total Assets = 25678000/49579000 = 0.51792

Therefor,

Z = 1.03A + 3.07B + 0.66C + 0.4D

= (1.03 x -0.03584) + (3.07 x 0.05254) + (0.66 x 1.17961) + (0.4 x 0.51792)

= -0.03692 + 0.161305 + 0.77854 + 0.207168

= 1.110105

According to Springate Model, It has a standard calcuation in which if the company has a value Z > 0.0862 then it will be classified as a healthy company, While company's with a value of Z < 0.0862 then it will be classified as potential company bankrupty.

As per above scenario, Z = 1.110105. Were Z is greater than 0.0862. It means the company's financial health is good.

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