CREDIT REVIEW

PROJECT
Hana Microelectronics Public Company Limited
Submitted to A. Watsakorn Thepthim
Nguyen Thuy Duong 4426804
Ozkan Sarikaya 4425239
Md. nayeem Adu!!ah 442"364
A#ri! 4425""3
No$ri! 45"5464
1
Table of Contents
*Purpose of the Application 3
*Company Profile 3
* PART I: The 4 Cs of credit analysis 3!3
*Part II: "usiness Plan and #anas $inancial Instrument !3!%
*Part III: Ratio Analysis !%!&
*Conclusion
2
Purpose of The Application
This is to request for approval on merchandise credit form Hanas supplier or on
financial capital for Hanas operation from !ank "#
Compan$ %rofile&
Corporate 'ncorporation
Hana (icroelectronics %ublic Compan$ )imited *as established in 1+,- and
became )isted on the Securities ./chan0e of Thailand in 1ebruar$ 1++2. Hana
Technolo0ies )td 3HT)3 *as mer0ed into Advanced 'nterconnect Technolo0ies
)td 3A'T3 on 21st 4ecember5 1+++.
The Compan$ operates in Thailand and its principal activit$ is manufacturin0 of
electronic components.
PART I: The 4 Cs of credit analysis
!' C#ARACT(R:
Character is the 0eneral impression that the compan$ made on potential lender .And from
that5 the lender *ill form a sub6ective opinion as to *hether or not7 the compan$ is
sufficientl$ trust*orth$ to repa$ the loan or 0enerate a return on funds invested in $our
compan$. 'n this section5 Hana .lectrics back0round5 e/perience in business or industr$ *ill
be revie*ed and taken into credits consideration.
)i' *tren+ths
2
An e/perience business team *ith an acceptable financial foundation rated A8
S9%# and !!!: (ood$s#.
A stron0 clutter of lo$al customer 0roups in both local and international
markets.
World*ide positive reputation earned5 thus possessin0 read$ trust from
prospects makin0 it easier for the firm to 0et ne* customers.
(ature learnin0 curve for or0ani;ation economies of scales achieved#5 and
0ood*ill in e/istin0 business.
<*ned distribution5 renderin0 hi0h qualit$ control
./perienced and competent mana0ement team
=er$ diversified business portfolio *ith (arket e/pansion polic$7
The firm serves customers of various industries *hich are both positivel$ and ne0ativel$
correlated5 thus their risk in bankruptc$ is diversified5 *hile at the same time attractin0
investors funds since the polic$ indicates to them that the firm al*a$s5 *ith its e/istin0
resources5 creates business opportunities in ne*5 but hi0h 0ro*th>potential se0ments or
industries in order to 0ain more profits.
4ifferentiation strate0$7 focusin0 on creatin0 and sustainin0 positive lon08
term relationship *ith customers5 as *ell as providin0 hi0h variet$ of hi0h qualit$
tailored products and service5 especiall$ those *ith hi0h comple/it$ and specific
application5 to serve each customer.
Total solution offerin0s5 allo*in0 closer relationship *ith customers and
increasin0 their dependenc$ *ith the HA?A Compan$.
Available capacit$ read$ to serve increased demands.
@overnment support7 !<'s privile0es and benefits
)ii' ,ea-nesses:
Tendenc$ to follo* conservative polic$ on investments includin0 %assive in
utili;in0 4ebt financin0
?ot much effective use of financial instruments to hed0e itself a0ainst the
quite uncontrollable> macro8environmental risks like interest and forei0n currenc$
risks.
Absent in media covera0e for consumer require heav$ investment in publicit$
and advertisement.
Aestricted distribution channels5 due to desire for hi0h qualit$ control and
close mana0ement
Slo* ne* product development
B
Annual 1CD pro0ressive lease pa$ment obli0ation
Character indicates an applicants *illin0ness to pa$ debt as a0reed. So *hen *e
anal$;ed the Hana .lectrics5 *e have found its a rated compan$. So5 compan$ can
easil$ use debt financin0 such as issuin0 bond5 or take credit from an$ bank to finance
an$ pro6ect. Thou0h the compan$ has some *eaknesses like lackin0 of media covera0e5
controlled functional distribution channel5 it *ill not affect on their performance to pa$
back their debt.
.' Capacity:
Capacit$ to repa$ is the most critical factor. The prospective lender *ill *ant to kno* e/actl$
ho* the compan$ intends to repa$ the loan
T$pe of business& .lectronics Components
8 ?ature of !usiness
Hana (icroelectronics %ublic Co.5 )td. and its subsidiaries mainl$ involve a sin0le industr$
se0ment in electronic component and mainl$ carried on in the 0eo0raphic area in Thailand5
Hon0 Eon05 FSA and China.
Industry Analysis
Industry: .lectronic component manufacturin07 particularl$ in Semiconductor
.lectronic components manufacturin0 is a small sector *ithin the overall electronic
en0ineerin0 industr$5 and can be se0mented into active and passive components.
8 Active components include& inte0rated circuits 'C
G
#5 discrete semiconductors5 electronic
tubes5 optoelectronic components and flat8panel displa$s.
8 %assive components include& capacitors5 resistors5 *ound and ceramic components.
General information:
The industr$ is pressured b$ innovation and to*ards shorter time c$cles5 reduced cost5 and
improved qualit$. At the same time5 it is driven b$ demands for products that are smaller5
li0hter5 cheaper5 and better than the ones the$ replace.
Apart from impact from economic factors5 this industr$ is hi0hl$ related *ith man$ other
industries since the products and services here are used in producin0 man$ other products
and services in a number of industries. Thus5 the industr$ is quite c$clical and fluctuation
accordin0 to the overall economic conditions. Ho*ever5 the c$clical effect is alleviated
considerable as the electronic components serve diverse industries5 some of *hich *hose
G
H
demands are ne0ativel$ correlated. Thus5 the industr$ risk as the *hole is quite diversified
and smoothed out.
/ar-et *tructures:
8 The market>industr$ is considerabl$ fra0mented due to its ver$ *ide products application in
man$ other industries like electronic equipment7 computers5 telecommunication5 etc.
8 Ho*ever5 there are not man$ bi0 pla$ers about 1H2 leadin0 companies *orld*ide#5 but a
hu0e number of small operators.
8 The market is c$clical accordin0 to the economic c$cles and the fluctuations of other
related do*nstream industries.
Industrys *uccess $actors:
8 'nnovation7 launch and market innovative products as quickl$ as possible
8 Hi0h investment and focus on Aesearch and 4evelopment
8 4ependence on ed0ed>latest technolo0$5 *hich *ould increase production efficienc$ and
thus competitiveness
8 .speciall$ for business clients# Aeliabilit$ both in product qualit$ and service7 on8time
deliver$5 technical supports5 etc.
8 Aelationship and trust0
(conomic $actors Affectin+ the Industry:
Cost of Doing Business:
"usiness costs
The cost of doin0 business in an econom$ is an important consideration for the industr$.
These include costs of emplo$ees5 especiall$ in the microelectronics industr$5 as
professionals must be hired. Aesearch and development costs in the microelectronics industr$
are also of 0reat importance as the business cannot survive *ithout constant development.
Cost of materials used5 utilities5 and ta/es are also important considerations. Ho*ever5 it is
important to reali;e that lo*er ta/es ma$ indicate that the education level in that
econom$>re0ion is also lo*.
Interest rates
'nterest rates indicate ho* much it costs to obtain financin0 in the econom$. The
microelectronics industr$ needs to make hu0e investments into its operations7 therefore
interest rates *ill affect the industr$ hi0hl$. Chinas and Thai interest rates are not hi0h7
therefore the cost of financin0 is not hi0h.
I
Business Climate:
(conomic +ro1th
Hi0h economic 0ro*th indicates opportunities for the microelectronics industr$. The
more 0ro*th5 the more the demand for hi0h technolo0$ products. The 0ro*th in China is
a 0ood -D5 and 0ro*th in Thailand5 bein0 H.2D recoverin0 from the crisis5 indicate that
there are 0ood opportunities for the microelectronics industr$ in those economies.
"usiness cycles
!usiness c$cles influence business costs as *ell as demand for the product5 0enerall$5 the
operation level. The econom$s abilit$ to avert recessions pla$s an important role.
Thailand is pa$in0 more attention no* to controllin0 the econom$5 havin0 had learned a
lesson durin0 the 1++, crisis. Chinas economic control is rela/ed and ma$ cause some
doubts5 but 0eneral econom$ is stron0 for no*.
?ormal practices are that credit mana0ers vie*point become more optimistic durin0 the
peak of business c$cle or the economic 0ro*th is stron0. %ut other *ords5 credit mana0er
must be a*are of direct and indirect competitors *ho are offerin0 the same these mutual
customer
Income and *pendin+
The income in the econom$ forecasts spendin05 therefore demand for the industr$s
products. .conomies *ith hi0h income levels ho*ever also add to the costs. The income
per capita is JB5,CC and J,5CCC in China and Thailand respectivel$5 *hich indicates a
possible labor cost advanta0e5 but not a demand disadvanta0e5 since both countries focus
relativel$ a lot on industries and construction5 rather than on a0riculture5 for e/ample5
indicatin0 0ood demand for microelectronic products. Thailand recentl$ e/perienced
consumption and investment spendin05 *hich is promisin0 for the industr$5 *ith more
competition to be seen.
2o3ernment policies
@overnment policies control if the industr$ is facin0 some constrictions or havin0 an
opportunit$ of 0overnment support5 like subsidiaries5 or other kinds of protection. %olitical
controls are ti0ht in China5 ho*ever economicall$ rela/ed and supportive and developin0 in
Thailand.
/ar-et conditions
The demand and suppl$ forces and the competitive structure of the industr$ *ill affect the
industr$s strate0ies. There are no ma6or market leaders in this industr$5 so the prices are
not determined b$ the fe*5 but rather b$ competition.
,
Inflation
'nflation is able to affect the industr$ because it *ill influence the revenue and profits the
compan$ earns. Hi0h inflation ma$ affect the industr$ ne0ativel$. China and Thailand are
both e/periencin0 lo* inflation rates.
Population:
The condition of the industr$ depends hi0hl$ on the population5 as *orkforce is needed to
develop and produce the products and customers are needed to bu$ and use the products
to run the business. Several factors influence the availabilit$ of this resource
Population +ro1th
The abundance of needed *orkforce depends on the population 0ro*th. Stron0
population 0ro*th *ill ensure *orkforce availabilit$5 0ivin0 more room to choose the
ri0ht
%eople for the *orkforce. The population 0ro*th rates are C.ID and C.+HD for China and
Thailand respectivel$5 bein0 quite moderate5 and presentin0 an opportunit$ for e/pandin0
*orkforce.
(ducation le3el
%erhaps even more important is the education level of the population5 since the qualit$ of
the output5 therefore the competitive stren0th of the producer depends on the abilit$ of the
emplo$ees to present such abilit$5 *hich is dependant on the education level. (oreover5
the customer base *ill be determined b$ the education level as *ell5 as electronic
products are demanded more b$ more educated consumers rather then the uneducated
ones. Chinas literac$ rate is -ID and Thailands +ID *ith both countries able to provide
educated *orkforce.
4nemployment rate
Fnemplo$ment rates indicate ho* much people are available for the *orkforce. A hi0h
unemplo$ment rate ma$ mean that there is an abundance of *orkforce to choose from5
and lo* unemplo$ment rate sho*s that there mi0ht be a problem *ith findin0 the
necessar$ *orkforce5 and the companies of the industries ma$ have to offer better
conditions to their emplo$ees5 *hich increases costs. The unemplo$ment rates for China
and Thailand are 1CD and 2.+D respectivel$5 *ith China havin0 more abundance of
*orkforce.
-

5ther factors
These include other population conditions5 such as population 0eneral health and health
care availabilit$5 location and mi0ration5 as *ell as 0eneral morale of the population from
political and economic circumstances.
Industry 2ro1th analysis:
Apart from 0lobal economic slump and terrorist factors5 persistent softness in the
telecommunications and *ireless handset markets alon0 *ith *eakness si0n from %C
sector5 the lar0est sin0le8application market for semiconductors5 the *orld demand for
electronic component declined dramaticall$ in late 2CCC till mid 2CC2 and started to pick
up since then5 but at a slo* pace
1
and *ith fluctuations until mid 2CC2. Ho*ever5 the
industr$ has recovered recentl$ *ith the demand increase mostl$ in developin0 countries
and decrease or rise a bit in advanced lar0e markets>nations5 as appears in the 0raph
belo*&
1
+
Source: .lectronic Components 4ivision *ithin K=.'
G
5 the @erman .lectrical
and .lectronic
%rofit is the compensation an entrepreneur receives for the assumption of risk in a
business venture. The profitable business must cover its overhead e/penses and 0enerate
profits for its o*ner out of its 3after8product8costs3 cash.
G
The industry is and will be growing due to:
@ro*in0 stabilit$ of the *orld econom$
Stren0th and rapid e/pansion of emer0in0 economies in the %acific Aim and )atin
America7 openin0 ne* 0eo0raphical markets
Continuous>more serious development and increasin0 market penetration of products
heavil$ dependent on electronic components5 includin0 personal computers5
electronic net*orks and C4 pla$ers.
An increasin0 reliance on electronic equipment in industr$5 commerce and the home7
ne* products5 not $et ima0ined5 *ill appear5 *hile other products *ill disappear5 but
the impact of electronics on the lives of people ever$*here looks set to 0ro* for the
foreseeable future.
Continuous 0ro*th of semiconductor sales7 more and better application in products
*hich have hi0h 0ro*th no* and in the future like *ireless products such as 1lash
and 4i0ital si0nal processors or %C related products such as (icroprocessors and
4AA(.
Industry Profita6ility analysis:
Despite recent and continuous price erosion7 the industry would be somehow profitable
because of expected higher demand for electronic components which is due to:
'ncreased demand for consumer electronic products& the trend to*ards lo*er cost
and hi0her qualit$ of producers7 this *ould 0ive hi0her value to final products for
customers5 thus entice them to bu$ more.
Aecovered 0lobal economic status7 customers have hi0her purchasin0 po*er.
1C
2ross profit:
@ross profit increases from 25CI-5CCC to 2522C5CCC! in $ear 2CC2.This sho* that
compan$ can mana0e their variable cost ver$ *ell. This is 0ood si0n for the lender.
5peratin+ Profit /ar+in
Another measure of $our profitabilit$ is the operatin0 profit mar0in. This is the core cash
flo* source that is e/pected to 0ro* $ear to $ear as $our business 0ro*s5 and it e/cludes
!usiness rivals more creative marketin0 strate0ies to emplo$ in the markets to
increase consumption and thus demand
Wider application of electronic components to more industries.
%rice erosion is soon to stop since man$ operators start to reali;e its bad impact on
themselves and the *hole industr$s profitabilit$
All ma6or industries that use electronic components have recovered and started to
take on heavier competition and drive more sales.
!e"ertheless profitability could be eroded by the following factors:
'ncreased competition from all pla$ers mi0ht lead to occasional price cuts
Continuous price erosion in other industries *hich consume electronic components as
ra* materials
Contraction of some industries that use electronic components in production like %Cs7
this leads to lo*er a portion of demand for electronic components.
'n capacit$5 *e anal$;e abilit$ to pa$ debt and make pa$ment as a0reed. We *ill focus on
three factors&1#industr$ trend52#0eneral economic conditions52#business c$cle. 'f *e
anal$;e industr$ trend5 *e *ill notice that hi0h research and development cost5
dependence on ed0ed>latest technolo0$5 *hich *ould increase production efficienc$ and
thus competitiveness. This *ill help to increase the capacit$ of the compan$.
'f *e anal$;e 0eneral economic condition5 and business climate5 *e notice that hi0h
0ro*th rate of econom$5 hi0h population 0ro*th5 hi0h educational level5 industr$ in
0ro*th state in China and Thailand7 make us optimistic about the capacit$ of the
compan$. So5 compan$ can use the debt financin0.
3'capital:
11
interest e/pense5 ta/es5 and 3e/traordinar$ items3 such as the sale of propert$ or other
assets.
Hi0her profitabilit$ from one $ear 2CC2&1511B(# to the ne/t 2CC2& 15-22(# is 0enerall$
considered a 0ood si0n for a compan$.
Hi0h operatin0 profit 1-22 million baht proves that compan$ can also mana0e their fi/ed
cost perfectl$. This also 0ood si0n for the compan$.
Capital !ase
The compan$ has 1H,51-+5C2- shares of votin0 stock outstandin0. 't has ,-I.CB (il.
!aht in common stock paid up capital5 *ith H !aht par value. The retained earnin0s
comprise the lar0est part of the capital base.
As a result5 compan$ has relativel$ stron0 financial position .'f a compan$ e/periences an
economic do*nturn5 or une/pected financial catastrophe5 it lon0 term survival is quite
ensured.
%ublic or %rivate
Hana (icroelectronics %ublic Compan$ )imited *as incorporated as a limited compan$
under Thai la*s and transformed to be a public limited compan$ on 2, Lanuar$ 1++2.
Where its Stocks are Traded
The stocks of Hana .lectronics %ublic Compan$ )imited are traded on the Stock
./chan0ed of Thailand5 *here it *as listed in 1ebruar$ 1++2 after it issued share capital
of B.,2Hm shares5 raisin0 !ht 2I+m.
An$ Controllin0 or )ar0e !locks
The lar0est block of stocks bein0 o*ned as of April5 2CC2 consists of 2B5B+I5CCC shares
o*ned b$ <(AC HE# )imited5 representin0 22.1ID of the votin0 po*er. The ne/t
lar0est controllin0 blocks are no lar0er than -.1,D5 *hich is o*ned b$ the State Street
!ank and Trust Compan$5 consistin0 of 125,2B5,BH shares. Another H.,,D of the
outstandin0 stock is also o*ned b$ the State Street !ank and Trust Compan$5 for )ondon.
Somers FE# )imited o*ns another I.I-D and the rest of the blocks are not hi0her than
the stated percenta0es above.
As can be seen5 the lar0est controllin0 block is o*ned b$ <(AC HE# )imited5 and the
rest are quite insi0nificant. 'n fact5 there are 2521C shareholders holdin0 shares *ith less
12
Share capital,-C5+1HShare subscription received in advance2+Share
premium152,-52I+Aetained earnin0s25-+,5,12Translation
ad6ustmentI2-52H2Total Capital !ase MCCC#I5H-H52--
.'8i9uidity
Ho* much cash does $our business have on hand for immediate useN
:uic- Ratio
The quick ratio sho*s *hat assets business can immediatel$ convert to cash5 such as the
business checkin0 account and mone$ market accounts.
than C.HD5 *hich indicates that the compan$ is indeed o*ned b$ the public.
Aecent Stock %erformance and Anal$sis
Hana (icroelectronics stock price has been decreasin0 at a decreasin0 rate in the $ears
2CCC82CC2 until a sharp increase of appro/imatel$ I,D in the $ear 2CC2. The returns
follo*ed similarl$5 bein0 ne0ative in the $ears 2CCC82CC2 and turnin0 bi0 in 2CC2. The
compan$ has been pa$in0 increasin0 dividends throu0hout the $ears and has been
boostin0 up the returns.
The price to earnin0s ratio has been quite hi0h in the $ear 1+++5 and althou0h it did
decrease at first5 it is no* even hi0her. The price to book value ratio have been reflectin0
the price and return movements5 decreasin0 until the $ear 2CC25 *here it is at a hi0h of
2.I+. This reflects 0ood e/pectations of the investors about the compan$. This also
presents an alternative lon0 term8finacin0 available for the compan$.
Capital is the financial stren0th sho*n b$ the level of reserve assets such as retained
earnin0s5 that is available for pa$ment .'f *e see the capital position of Hana .lectrics5
the$ have hi0h %>. ratio that *ill focus that the$ have enou0h evidence to pa$ back their
shareholders. We kno* that to 0enerate more assets5 *e need a superior capital base. The
more *e have 0ood capital base5 it should help us to 0o for debt financin0 that is positive
track si0nalin0 for the firm. So bank or suppliers are optimistic to 0rant Hana .lectrics
12
2CC2&C.+HB/
2CC2&1.CIH/
Current Ratio
The current ratio is a broader indication of liquidit$ because it includes inventor$. 1or
purposes of sho*in0 the compan$s immediate access to cash5 man$ lenders find it less
credit.
4'collateral
Collateral or 0uarantees are additional forms of securit$ the compan$ can provide the
lender. @ivin0 a lender collateral means that Hana pled0e an asset it o*ns5 such as its
fi/ed asset or its account receivable to the lender *ith the a0reement that it *ill be the
repa$ment source in case the compan$ canOt repa$ the loan.
Hana .lectrics compan$ has handsome of propert$ equipment5 plant5 considerin0
accumulated depreciation and provision for impaired assets5 amountin0 H,25B+C.22C
!.Compan$ has ver$ 0ood amount of account receivable fi0urin0 H,25B+C.22C! .This
t*o are the vital souces of collateral in case of lackin0 the compan$ faces in first three
sectors.
After anal$;in0 income statement5 *e notice that the sale is 0ro*in0 b$ HD comparin0 to
the $ear 2CC25that is the 0ood si0n for the lender5
Compan$ has positive net cash flo* from operatin0 activities. 'n 2CC25it is BIC5I2,.BI2
and the $ear 2CC25it is B1C5B-1.,H+.This is positive side for the lender5 cause compan$
has enou0h mone$ left for investin0 in fi/ed asset and pa$ to their shareholders.
Part II: "usiness Plan and #ana $inancial
Instrument
!usiness plan
Startin0 *ith (icro displa$ in <hio5 Hana had achieved a breakeven level throu0h further
rationali;ation and an increase in sales both for development and production. A strate0ic
decision *as taken in Lune to relocate one manufacturin0 line to 'C assembl$ facilit$ in
1B
useful than the quick ratio. 'n 0eneral5 lenders look for $our current assets to e/ceed $our
current liabilities.
Current ratio more than 2/ and the increasin0 current ratio comparin0 to the $ear
2CC22.H/# comparin0 to 2CC2 2.-/# indicated that the compan$ has more net *orkin0
capital in their hand to meet the short8term liabilities
3'8e3era+e
A$uttha$a. This *ill enable a reduction in cost5 an e/pansion in production capacit$5 and
allo* for a stron0er focus on development b$ the team in <hio.
?e* customers *ins have added the computer peripheral and mobile phone sub8
assembl$ industries to our assembl$ portfolio. Strate0ic tar0etin0 of 0ro*th industries and
a diversification of reliance on ma6or customers *ill be important in order to maintain
0ro*th.
<nce a0ain a stron0 focus on cost control and cost reduction allo*ed Hanna to
market their packa0in0 services a00ressivel$ *ith the results speakin0 for
themselves.
Hanas 1inancial 'nstruments &
$inancial ris- mana+ement and policies
The Compan$ and its subsidiaries are e/posed to risks from chan0es in market interest
rates and in currenc$ e/chan0e rates5 and from nonperformance of contractual obli0ations
b$ counterparties. The$ use derivative instruments durin0 the $ear5 as and *hen
the$ consider appropriate5 to mana0e such risks. The$ do not hold or issue derivative
instruments for speculative or tradin0 purposes.
Interest rate ris-
The interest rate risk is the risk that future movements in market interest rates *ill affect
the results of the Compan$ s and its subsidiaries operations and their
Cash flo*s. The Compan$ and its subsidiaries e/posure to interest rate risk relates
primaril$ to cash at bank and bank overdrafts. Since the ma6orit$ of these financial assets
and liabilities are short8term the Compan$ and its subsidiaries do not use derivative
financial instruments to hed0e such risk.
$orei+n currency ris-
1H
The levera0e ratios measure the compan$Os use of borro*ed funds in relation to the
amount of funds provided b$ the shareholders or o*ners. These ratios tell the lender ho*
much mone$ $ou have borro*ed versus *hat mone$ $ou and other o*ners have put into
the compan$. This is important because borro*ed mone$ carries interest costs and $our
business must 0enerate sufficient cash flo* to cover the interest and principal amounts
due to the lender. @enerall$ speakin05 companies *ith hi0her debt levels *ill have hi0her
interest costs to cover each month5 so lo* to moderate levera0e is nearl$ al*a$s vie*ed
more favorabl$ b$ prospective lenders.
The Compan$ and its subsidiaries e/posure to forei0n currenc$ risk relates primaril$ to
their revenues5 material purchase5 assets5 and pa$ables *hich are denominated in forei0n
currencies. 'n addition to those transactional e/posures5 the compan$ is e/posed to the
effect of forei0n e/chan0e movements on its investments in forei0n subsidiar$
companies5 *hich currentl$ are not hed0ed b$ an$ derivative financial instrument.
Credit ris-
The Compan$ and its subsidiaries e/posed to credit risk primaril$ *ith respect to trade
accounts receivable since most of their sales are made to a limited
?umber of customers and that all the compan$ and its subsidiaries revenues are derived
from the technolo0$ industr$. The mana0ement5 ho*ever5 believes that
the compan$ s and the subsidiaries ma/imum e/posure to credit risk is limited to the
carr$in0 amount of receivables less allo*ance for doubtful debts as stated
in the balance sheets.
$air 3alue
Since the ma6orit$ of financial assets and liabilities are short8term5 the
mana0ement believes that the fair value of financial assets and liabilities do not
materiall$ differ from their carr$in0 value.
PARTIII:Ratio analysis
Another tool the lender *ill use is financial ratio anal$sis. Aatios permit revie* of a
compan$Os current financial performance versus that of previous $ears or an anal$sis of a
compan$Os financial performance considers the status5 chan0es5 and relationships of
1I
?et debt to equit$ ratio improved from net cash position of C.1,/ to the net cash position
of C.2B/ due to cash flo* from operation.
4' Collection Period Ratio
1irst5 the collection period ratio indicates ho* quickl$ the compan$ collects the cash its
customers o*e it. The earlier $ou collect it5 the sooner $ou can put it to *ork purchasin0
more inventor$ or pa$in0 for current orders7 so the lo*er the number5 the better.
Collection period is increasin05 from H2da$s in 2CC2 to IBda$s in2CC2.'t means that the
compan$ needs more mone$ to back up the e/tra8collection period. S<5 that *ill increase
the financin0 cost. Thats not the positive side for the lender and their e/tra avera0e a0e of
critical components of a compan$Os health.
The lender also ma$ use financial ratio anal$sis to consider ho* a compan$ is doin0
*hen compared to another compan$. A limitation of such comparative anal$sis is that
different industries are driven b$ different factors. As a result5 the financial ratios of a
manufacturer and retailer can be quite different even thou0h both companies ma$ be
similarl$ successful.
)enders are trained to appreciate both the benefits and limitations of ratio anal$sis and to
consider financial results in the conte/t of the compan$Os 3peer 0roup3 of similar
companies *ithin its industr$. To find out *hat the benchmarks are for the t$pe of
business5
The follo*in0 section presents some *idel$ used ratios from four financial ratio
cate0ories& profitabilit$5 liquidit$5 levera0e5 and turnover. The lenderOs anal$sis also ma$
include ratios specific to the particular industr$.
!'Profita6ility

1,
inventor$ and avera0e collection period *ill increase the cash conversion c$cle for the
compan$. 'ncreasin0 cash conversion c$cle is the ne0ative for the lender.
#anas *tatement analysis:
.;;3 .;;.
Cash -C52C2.,+, 151BC5121.,2,
Aeceivables B--5H22.1,I H,I5I2+.1,I
'nventor$ 21H5B+,.222 BC25122.B-2
Short8term investment 151,25-H-.--, PPP
<ther current assets ,,52-+.-CB BB52B,.I-2
Total current assets 251,252-I.HC1 25,-+5I,+.HB+
1i/ed asset ,5HH25I+H.I,, I5B1C52+2.C2I
Total asset +5,2,5C-2.1,- +52CC5C,2.H,H
Current liabilities 15+B,5H+2.-IB 252BC51-I.,2I
1i/ed liabilities -BC52C2.C+H -+H52I+.1IB
?et *orth I5+2+52-,.21+ I5CIB5H1I.I,H
Total liabilities and net *orth +5,2,5C-2.1,- +52CC5C,2.H,H
Sales -5BHB5CCC -5CIC5CCC
?et profit 15I1H5CCC -II5CCC#
Ratio analysis .;;3 .;;.
Current assets to current liabilities 2.- 2.H
Quick ratio 1.CIH C.+HB
1-
4ebt to net *orth C.2B# C.1,#
Sales to inventor$ 2I.- 2C
Sales to receivables 12.+- 1,.2
Sales to net *orth 1.22 1.22
%ercent net profit to sales 1+ 1C.,B#
%ercent net profit total assets 1I.I +.B#
%ercent net profit to net *orth 22.2, 1B.2-#
Total assets increases *hile total liabilities decreases. The inventor$ has decreased
-,5I2I.2H5 from B.2-D to 2.2BD of total asset. This decline in inventor$ has been
accompanied b$ decreased in receivable5 leadin0 to the decline in amount of the current
asset as a part of total asset than before. Ho*ever5 the decline even further in liabilit$ lead
to the still acceptable current ratio in 2CC2.This current asset8to8current liabilit$ ratio
sho*s that current assets are still considerabl$ in e/cess of current liabilities5 indicatin0
that the firms are not in a dan0erous condition in this respect.
The quick ratio indicates that5 even *ith inventor$ omitted5 the current assets are equal to
the current liabilities. 1or this ratio5 the minimum for satisfactor$ conditions is often
stated as one to one. The debt to net *orth ratio has si0nificantl$ improved resulted from
both increasin0 in equit$ and decreasin0 in liabilities. Credit mana0ers normall$ prefer
that o*ners should have lar0er stake in the business than creditors.
The sale to inventor$ ratio indicates that the efficienc$ *ith *hich the mana0ement turns
its investment in merchandise into sales. This firm has ver$ favorable ratio.
The sale8to8receivable ratio is also improvin0 si0nificantl$ sho*in0 that the compan$
mana0ement is effectivel$ in collectin0. This implicit about compan$s *ise credit polic$
as *ell.
The increasin0 of both these ratios can be e/plained partl$ b$ the increase in sale and the
same time reduction in inventor$ and receivables. And it also reduces the amount of
1+
current liabilities accordin0l$. (ost of cash received invested in fi/ed assets5 implicit the
sacrifice of cash and the loss of opportunities to take cash discount.
The ratio of sales to net *orth sho*s ho* efficientl$ o*ners capital is bein0 used. Too
lo* a ratio means that o*ners capital is not bein0 used efficientl$& too hi0h a ratio sho*s
insufficient capital for the volume of business bein0 attempted. 'n this case5 the ratio is
too lo* and 0ettin0 *orse. The lar0er investment in fi/ed assets that are not full$
productive partiall$ e/plains the lo* ratio here
The net profit to sales appears to be much improvin0 and so are ratios of net *orth to total
assets and to net *orth. This means that compan$ is usin0 their ?%(5 TAT<5 equit$
multiplier ver$ effectivel$5 common shareholder are happ$. This is the 0ood si0n for the
lender.
** Conclusion:
Credit mana0ers5 either from5 suppliers credit department5 or bank credit function5
revie*in0 these situation above& the RB Cs credit anal$sisS and financial statement
anal$sis mi0ht find some indication of satisfactor$ and some of ver$ unsatisfactor$
conditions.
(erchandise credit is used to finance some firms current asset like its merchandise
inventor$5 most business require additional financial assistance to carr$ on operation. 'f
merchandise credit can not miti0ate the need of short fundin0 the$ can 0o for short term
borro*in0. As compan$s current ratio and quick ratio are ver$ hi0h *e can predict that
the$ can easil$ 0et merchandise credit from supplier. (erchandise credit mana0ement
concerns hi0hl$ speciali;ed t$pe of business credit8 facilitatin0 the sale of merchandise
and services in e/chan0e of credit.
<n the contrar$ a commercial bank ho*ever usuall$ have hi0her credit standard than
those of the merchandise credit. !anks must have hi0her credit standard because the$ are
entrusted *ith publics mone$. (erchandise creditor have *ider mar0in of profit from the
sale of merchandise than banks from the lendin0 of the mone$. !ecause of this5
merchandise creditors ma$ be more *illin0 to accept mar0inal risk and 0rant e/tension
not prudent b$ bank. (ore over amount of credit 0ranted b$ merchandise credit ma$
2C
represent a small portion of debtors debt obli0ation. !ank loan represent a ma6or portion
of firms debt.
"an-s are sub6ect to considered supervisin0. The loans are revie*ed periodicall$. So
the$ are ver$ much strict to 0rant the credit polic$. The$ *ill consider the financial
statement and past record carefull$5 and then issue the credit. Hanna electric has a 0ood
financial ratio out let5 so its not difficult for them to 0et bank loan also.
1or short term needs bank can 0rant them sin0le pa$ment loan. 't ma$ be repaid
*ith in 2C5 IC or +C da$s. Short term loan ma$ leave much business *ith inadequate fund
for continuous *orkin0 capital. 1or durable 0oods bank ma$ 0rant them business
installment loans. The repa$ment schedule t$picall$ matches the life e/pectanc$ of the
asset and the unpaid balance follo*s the depreciated value of the item financed.
!ank also set up line of credit *ith a ver$ 0ood business issuin0 checkin0
account .the require compensatin0 balances for all the times.
1rom our point of vie* bank can 0rant them line of credit *ith compensatin0
balances5 because the$ have ver$ 0ood reputations and 0ro*in0 industr$ trend.
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