Abstract
The memo is written with the purpose of discussing the financial standing of Atwood Oceanics, who has submitted an application for raising £5 million as a line of credit with the purpose of smoothing the variation in the cash flows of the company. We performed the financial analysis using the tool of financial ratios, as part of which, profitability and solvency ratios for the year 2014 were calculated. In addition, each ratio multiple was compared with the industry average and the assessment benchmark set by the bank.
Our analysis indicated that the company is in a strong profitability and solvency position to honor debt obligations and hence, the loan application of the company should be processed to Stage 2.
With the purpose of analyzing the financial trend in Atwood Oceanics, I calculated the financial ratios and compared the ratio multiples with the industry average and assessment criteria set for each ratio by the bank. Since the bank is largely concerned with the probability of repayment of lines of credit of $5 million requested by the entity , only profitability and the solvency ratios of the company were accessed. My calculation revealed that even though the stock price of the company has plummeted significantly over the year time, however, the ratio multiples confirms that the company is highly profitable and is very much solvent to pay its debt-related obligation. Below I have included the profitability and solvency ratios of the company followed by the discussion relating to the ratios:
Profitability Ratio:
i) Return on Sales: Net Income/ Total Sales
= 340822/1173953
= 29.03%
-Industry Average: 3.5%
-Assessment Benchmark: 3.5%
ii) Return on Assets: Net Income/ Total Assets
= 340822/4507228
= 7.56%
-Industry Average: 6%
-Assessment Benchmark: 10%
iii) Growth in Operating Cash Flows(2012-2014):
2014: (443-256)/256= 73.04%
Solvency Ratios:
i) Current Ratio: Current Assets/ Current Liabilities
=497807/167377
= 2.97: 1
-Industry Average: 2: 1
-Assessment Benchmark: 2: 1
ii)Debt Ratio: Total Debt/ Total Assets
= (11885+1742122)/4507228
= 0.39
-Industry Average: 0.65: 1
-Assessment Benchmark: 0.65:1
iii) Interest Coverage Ratio: Net Income/ Interest Expense
=340822/41803
= 8.15
-Industry Average: 4: 1
-Assessment Benchmark: 4: 1
Beginning with the profitability ratios, during 2014, the company earned a net margin of 29.03% on its sales figure and this was significantly higher than the industry average and the bank’s assessment benchmark of 3.50%. On the other hand, the company also generated a sustainable return of 7.56% on its asset base. While this multiple was higher than the industry average of 6%, it was less than the assessment benchmark of 10% set by the bank. Finally, the metric that confirms the sustainability in the bottom line profits of the company is the operating cash flow,which has surged by 73.04% in three years. This also confirms that the company is generating strong cash flow from its operations.
As for the solvency ratios, here also the ratio multiple has indicated an optimistic outlook.The debt ratio, which reveals the percentage of assets financed with debt funding, was calculated at 0.39,which was significantly lower than our assessment benchmark of 0.65. On the other hand, the interest coverage, which indicates the interest paying capacity of the company, was calculated at 8.15 and was also above than the industry average and the assessment benchmark of 4:1. Therefore, the trend in the debt ratio and interest coverage ratio of the company confirms strong and sustainable long-term solvency of the company.
I also tested the short-term solvency position using the current ratio and found the multiple to be 2.97. This was also higher than the industry average and our assessment benchmark of 2:1, thus confirming that Atwood Oceanics is having strong solvency roots, both for short-term and long-term.
Therefore, on the basis of outcome of the financial ratios, I recommend that the loan application should be proceeded to Stage 2 of the analysis. My recommendation is solely based on the financial ratios which confirms that Atwood Oceanics is in a good profitability and solvency position to honor its obligations. Moreover, the requirement of £5 million as line of credit for smoothing the variation in cash flows, is also a very nominal amount compared to the existing operating cash flow of £443 million. Hence, we can be sure that the bank will not bear any risk by approving this loan application.
Regards,
References
Atwood Oceanics. (2014). Annual Report 2014. Atwood Oceanics.
