Three Horseshoes Limited

Background

Three Horseshoes Limited (TH Ltd) is a manufacturer of novelties and ornaments given out as gifts to people celebrating anniversaries, weddings or similar occasions. TH Ltd is in the process of moving their banking to us from XYZ bank, at this point we do not have all the information required to make an informed decision, however, we shall undertake a financial analysis of the company's performance to assess the viability of this business.

Key Assumptions

From the information we have we made drawn the following assumptions:

1. TH Ltd is a small partnership / family business.

2. The Director(s) are the principal shareholders

3. Current banking facilities include Bank Loan, Overdraft, and Equipment Leasing/Hired purchase. (From Balance Sheet)

4. Accounting information provided for year-end 2009, 2010 and 2011.

Financial Performance

Safety Ratios

Gearing: - Giving assumptions 1&2 above, we consider TH directors loan as part of Equity on the basis that the directors are also shareholders.

We have also used TNW (Total Capital + Reserves - Goodwill) in obtaining our gearing ratio (as against shareholders fund) on the basis that TNW provides a more accurate value of the business in the event of insolvency as goodwill will have no value at the point.

Gearing for TH Ltd reduced by 33% in 2010 compared to pervious year (2009: 166%, 2010:102%) largely due to a 16.5% increase in capital base from £1,001 in 2009 to £1166 in 2010 coupled with a significant reduction in cash/overdraft position. However, gearing marginally increased to 105% in 2011, representing a minor increase by 3.1%. Overall, the trend appears stable between 2010 and 2011. The significant jump between 2009 and 2010 is justifiable.

Operating at a gearing ratio in excess of 50% - 75% TH Ltd is highly geared, this is however, consistent with companies operation within the manufacturing sector with 75% to 110% being common1. With base rate at an all time low at 0.5%, this level of gearing may not be an issue for now, we would encourage a structure, which will see gearing reduce to near 75% as current high inflation could prompt a rise in interest resulting in higher cost of debt servicing for the company. This will increase the risk borne by the bank as the company's probability of default (PD) increases.

1. source: Moody's ratings and financial database as of July 1, 2006

Tangible Net Worth (TNW) - This increased from £401 in 2009 to £666 in 2010 representing a 66% increase, this slowed down last year increasing by a marginal 1.4% (2011: £675) due to reduction in shareholders funds (2010: £1,166, 2011: £1,075). Over the last three years, TNW has been on a rise with an overall average increase of 33.7% during the period suggesting a considerable level of comfort in debt realisation the event of insolvency.

Liquidity Ratios

Current Ratio - This reported at 1.68 in 2009, increased to 1.86 in 2010 an increase of 10.3% compared to previous year. Last year it reported at 2.34, a 26.0% increase when compared to the year before. Strong increases here mainly due to current asset, which has seen an encouraging improvement at an average of 39.4% over the period under review, while current liabilities has experienced a slower rise at an average of 18.9% over same period.

Overall, the current ratio has seen a year on year increase with an average increase of 18.2% over the three-year period. Even though