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Supplier’s Financial Evaluation according to the standards of CIPS

 

 

 

 

 

Table of Contents

 

Executive Summary. 3

Introduction. 3

a)      Evaluation of supplier finances highlighting their strengths and weaknesses. 5

Liquidity Ratio Analysis. 5

Solvency ratio Analysis. 6

Efficiency analysis of supplier. 8

Profitability ratios Analysis. 10

Other Ratios- Cash ratio and Financial leverage. 12

DuPont Analysis. 12

Summary of Strengths and Weaknesses of supplier. 13

Strengths. 13

Weaknesses of supplier. 14

b)     Justified recommendations for Facilities Management Services. 14

Conclusion. 15

Pre-qualification standards. 15

References. 16

Executive Summary

This paper explores the financial performance of a supplier selected byChartered Institute of Procurement & Supply (CIPS) in financial year (FY) 2013 and 2014. The careful observation into the accounts of the company reveals that overall company appears stable and it has shown positive and increasing trends in key ratio including efficiency ratios, profitability ratios and other ratios. The DuPont analysis also revealed that return on equity (ROE) has shown increasing trend showing the strength in company to generate returns for its shareholders. However, what alarming is the continuous deterioration in company’s solvency and liquidity ratios. It is observed that company has increased its debt burden in FY 2014 and its debt has increased dangerously high as 91.89 % of the company is funded by debt and mere 8.11 by equity financing. However, Supplier’s cash position has improved, its assets are efficiently used, its net and gross profit margins have improved significantly but its debt burden over poses and threat in short term and long term, and in case of any decline in revenues, supplier will have to generate the short-term loans to pay off its creditors. Therefore, it is recommended that company should focus on decreasing its leverage position and increasing the lesser expensive shareholding to ensure stability and growth in the future.

Introduction

This project analyzes the finances of supplier as perChartered Institute of Procurement & Supply detail and explores in depth the weaknesses and strengths of this organization. In addition, this paper provides the recommendations regarding this organizations ability to exercise for facilities management services emphasizing on the limits which should be placed on the financial exposure. All the relevant and important financial ratios are calculated and the financial progress of supplier with in last two years is shown with the help of tables and graphs.

This company of the supplier promotes and develops the high standards of professional skills among all those engaged in purchasing and supply chain management. It offers assistance to individuals and organizations and to entire profession as a whole (CIPS, 2015). In addition, the company works in number of different domains other than assisting in procurement and supply management, ensuring the implementation of regulatory environment, company is engaged in advising different organizations in international development and runs a charity by the supplier helping those suffering hardships in life in their journey to procurement and supply excellence.

The company has been a major contributor in advising the companies regarding their processes of supplier appraisals and what is exactly required to ensure that all stakeholders are taken care of. Recently, company performed a survey on more than half of the companies sin Australia and found out that most of them have no clear idea beyond the second tier of their supply chain to now that where does their product come from. It provides such analysis to make the industry aware of their shortcomings as they found out that one in five Australian supply chain managers have lost out financially in the last years due to poor relationships with its suppliers(Main, 2015).  Therefore, company plays a key role in understanding the principles of great supply chain management and forging closer relationships with its suppliers, in order to ensure the safer and sustainable business practices

 

Evaluation of supplier finances highlighting their strengths and weaknesses

Before indulging into practices of the company, financial performance of supplier in last year’s is analyzed and their progress is evaluated by using different ratio analyses.

Liquidity Ratio Analysis

First, liquidity ratios are analyzed to assess the short-term liquidity position of the company. According to the states retrieved, following table shows the liquidity ratios for the financial year (FY) 2013 and FY 2014.

 

2014

2013

Current ratio

1.12476

1.104721943

Quick ratio

1.10808

1.061993972

The current ratio for the two subsequent years shows that supplier’s ability to pay off its short-term liabilities has increased in the last year as compared to FY 2013, which means that an amount of time required for the company to pay for its current liabilities is limited. Company has attained this better position because company’s current assets have increased by 31% as compared to surge in current liabilities if 29% approximately.

However, it must be emphasized, though, supplier’s position has improved but it is by no means an ideal one as current ratio of 1.12 means that company has 1.12 times more current assets than liabilities to pay off its short term creditors. Similarly, the quick ratio has increased to 1.11 from 1.06 form FY13, which indicates that supplier’s capability to pay its current liabilities, when they come due with only quick assets has increased.Therefore, it can be argued that company can convert its assets in to cash within 90 days marginally better than before. Therefore, supplier with quick ratio of just over 1 indicates that quick assets are equal to current assets and it reveals that company can pay its current liabilities without having to sell of its non-current assets(Lysons, Farrington, & Kenneth, 2010). To conclude, it can argued, company has satisfactory liquidity position but it’s by no means an ideal position.

Solvency ratio Analysis

In the next step, solvency ratios of the company are analyzed which measures the supplier’s position and ability to sustain operations indefinitely by comparing its debts levels with assets, equity and earnings of the company(Day, 2002). In other words, it determines the supplier’s ability to pay off its long term debts to creditors, bondholders, and banks. The key solvency ratios calculated are given in the table below:

Solvency ratios

 

2014

2013

Total Debt Ratio

0.91893

0.895592735

Debt equity ratio

11.3352

8.57787757

Equity ratio

0.08107

0.104407265

 

 

 

 

The increase in total debt ratio figures by nearly 2% indicates that firms total liabilities as a percentage of its total assets has increased. It shows that number of assets CIPS has to sell has increased in order to pay off its liabilities and company’s leveraging position has deteriorated. In general, debt ratio of 0.5 is considered less risky as in this case the ratio is nearly 1, which questions the company’s stability and potential of its longevity. It effectively means that 91.83 % of the assets of the company are owned by its creditors. It also indicates that this year company has increased its liabilities.

The graph above shows the leveraging position of the company in detail. The equity ratio of the company also shows that company has decreased and company has increased its dependence on debt, therefore, it can be argued that amount of investment by the owners investment has decreased from 10.44% to 8.1% in the FY 2014. So, it can be argued that this ratio is not in favor of the company and it shows that company is not worth investing in and it further re-emphasize that company is unsustainable and very risky and it will be even riskier for the company to get any further loans. Since, it is well known fact that investors prefer investing in companies with higher investment levels and highly favorable for the investing point of view. In addition, though, it would have been cheaper for supplier to prefer equity investment rather than debt financing but company opted for the highly expensive debt financing again.

The debt to equity ratio for supplier has increased from 8.57 to 11.3352 from FY 2013 to FY 2014, so again, supplier has increased its dependence on creditors and higher percentage of company’s financing is used this year from bank loans rater than investor financing (shareholders). Once again, it can be argued that as the debt to equity ratio is extremely high and way greater than the general 1% expected of the companies undertaking high risk, when the investors and creditors have equal stakes in the business.  Since this ratio is exceedingly high, therefore, in supplier’s investors do not have much investment and this could mean that supplier do not want to fund the business operations because company is not performing well and its financial health is deteriorating. In addition, may be company has not performed as well, as expected and lacks the performance and that is why its needs an extra debt financing.  To conclude, it can be argued that supplier is highly dependent on debt and is very risky company to invest in, since it relies too much on debt for financing its long-term operations.

Efficiency analysis of supplier

In this section, the efficiency ratios or the company is calculated to measure that how company can utilize its assets to generate income for the company. These ratios will show that how much attractive supplier is to investors as companies generally use these ratios to help improve the company and convince the investors that creditors looking into the operations of profitability of the company.The following ratios given in the table below are calculated:

 

 

Asset Management

 

2014

2013

Inventory turnover

114.8039

77.90733057

Asset turnover ratio

3.494102

3.412200178

 

The asset turnover ratio in this case has marginally increased from 3.41 in FY 2013 to 3.49 in FY 2014. This shows that ability ofsupplier to generate sales from its assets by comparing net sales with the averages assets has increased marginally. This average is impressive, as figure of 3.49 means, that supplier earns 3.49 dollars from every dollar invested in the assets of the company. High turnover ratios for supplier mean that company is using its assets efficiently. In addition, ratio of 3.49 means that investors and creditors can have an idea that supplier is managed efficiently to produce its products and sales.

Similarly, inventory turnover ratio is calculated and since the value is very high, it shows that company has been successful in efficiently handling its merchandize.Therefore, it shows that supplier does not overspend by buying too much inventory and does not store too much inventory unsold in its warehouses and has the ability to effectively sell the inventory it buys(CIPS, 2014).To conclude, it can argued that asset management appears efficient and it is the indicator that company’s inventory is liquid and it can easily turn it into cash and has the ability to efficiently use all of its assets more effectively.

Profitability ratios Analysis

The profitability ratios are calculated in this section. These ratios show the company’s ability to generate the profits from its operations. In addition, it provide investors and creditors a chance to judge that whether the company is able to receive the returns on its investment based on given resources and assets. Following table shows the figures calculated for two subsequent two years.

Profitability ratios

 

2014

2013

Return on Equity

0.63528

-0.319546207

Return on Assets

0.05783

-0.033362945

Net Profit margin

0.01655

0.009777546

Gross margin ratio

0.22771

0.185296075

 

Gross margin of supplier shows that company has been more profitable in FY 2014 to sell its stock as compared to FY 2013, as it figures improved from 18.52 % to 22.71% respectively. This means that supplier has been selling its stock at high profit margins and this increased the company’s ability to pay its operating expenses like salaries, and utilities, etc. Similarly, there has been a significant rise in the net profit margins for the company from 9.8% to 16.55% from FY 2013 to FY 2014 respectively. It shows that net income earned with each dollar of sales has improved and it indicates that with the increase in sales at certain level, profits have increased as well. The high ratios are indicating that supplier has been successful in generating more revenues, while keeping expenses constant and expenses lower. In additions, its shows that company’s ability to manage the expenses relative to its net sales has increased.

The most interesting figures are of return on equity (ROE) and return in assets (ROA) which were negative in FY 2013 but both improved and showed the considerable increase in FY 2014. The return on equity shows the ability of the company to generate profits from its shareholders investment. The figure of 0.63 % shows the supplier’s ability to use its money more effectively to generate profits and play a crucial part in the growth of supplier. Besides, the ROA figure also shows that company has improved its capability to efficiently manage its assets to produce profits. Supplier has used the purchased assets effectively to convert its money into profits and net income.

It was important for the company to have positive ROE and ROA figures because higher ratios are more favorable with the investors and it shows that supplier is effectively managing its assets to produce the greater amount of net income. Therefore, the positive ROA shows the upward trend and improving performance of supplier.

Other Ratios- Cash ratio and Financial leverage

Some other ratios have also been calculated based on careful examination of the final accounts given. These are given in the following table

Other ratios

 

2014

2013

Cash ratios

0.281523

0.162017611

Financial Leverage

12.33524

9.57787757

 

The cash ratio shows that the amount of cash possessed by the company has increased considerably in FY 2014 as it figure increased from 0.16 to 0.28. It shows that supplier’s ability to pay its short-term liability has increased significantly and it is very important from investment point of view because investors look very keenly at this figure as they assess the company’s ability to maintain adequate cash balances to pay off their current dents when they are due. However, since this ratio is less than 1 which means that supplier will need more than its cash to pay off its current debt. To conclude, it can be argued that since creditors are always interested to look into this figure, therefore, company has to improve its operational performance to generate more ach in the coming years to ensure the creditors regarding the stability and ability of the company to generate cash to pay off its creditors with ease.  

DuPont Analysis

Similarly, the financial leverage ratio of the company has increased from 9.57 to 12.33 from FY 2013 to FY 2014.  This again determines that how much of the assets of the company are financed by the equity. It is used in the calculation of DuPont Analysis, which is given below:

 

 

DuPont Analysis

 

 

 

 

2014

2013

 

 

 

Return on Equity

PM

* Total Asset turnover*

 

Financial Leverage

 

 

0.713368

0.319546207

 

 

 

The DuPont analysis shows that overall supplier’s ability to generate the return on equity has increased. Therefore, it can be argued that company has the capability to raise its ROE by keeping its high profit margins, increasing asset turnover ratio or by leveraging assets in more efficient way as is shown by the graph below

Since all the ratios which are the component of the DuPont analysis depict that company has been successful in increasing all those ratios which can affect the value of ROE.

Summary of Strengths and Weaknesses of supplier

Strengths

From above given discussion, it can be stated that the company has shown immense strength in its ability to generate the greater gross and profit margins from previous years and its return on assets and inventory turnover also indicate the promising future and its increasing efficiency in utilizing its assets to generate greater profits. In addition, the return on equity and return on assets have also increased depicting that company has been successful in generating returns for its shareholders. The most remarkable and encouraging increase were in cash ratio which has shown significant increase.  In addition, the DuPont analysis has also revealed that return on equity has increased amid increase in total asset turn over, and better profit margin ratio.

Weaknesses of supplier

However, there has been some weaknesses observed due to high debts, which have continued to mount even in the FY 2014. Its debt burden over poses and threat in short term and long term and in case of any decline in revenues, supplier will have to generate the short-term loans to pay off its creditors. Though, liquidity ratios have improved marginally but total debt ratio shows that 91.83 % of the assets of the company are owned by its creditors. It also indicates that this year company has increased its liabilities as it increased from 89.55% in 2013. Therefore, it can be argued that supplier’s debt position is its major threat and it can challenge the company’s solvency in the coming years.

Justified recommendations for Facilities Management Services

When looking into the company’s current financial position, it can be stayed that company is still a driving force and still a good source for facilities’ management services.However, any potential business partner should go through the debt burden company is carrying, though its other key financial indicators are in excellent state, therefore, depending upon the risk any business is willing to take and what kind of service they are willing to use, they can go in to a contract. However, since the company is global in nature and has huge portfolio, therefore, it will not be risky for the businesses to get in to business with them with as much exposure they are willing to take.

Conclusion

To conclude, it can be argued that supplier has the potential to continue its business with zeal in the coming years as most of the financial indicators indicate that company is in stable position and showed the better performance in financial years 2014 as compared to FY 2013.   
It has shown increasing trends in key ratios in profitability ratios, efficiency ratios and cash ratio. The DuPont analysis also indicated that return on equity (ROE) has shown increasing trend which depicts the strength in company to generate returns for its shareholders. However, the matter of concern for supplier is worsening situation of its debt to equity ratio and its continuous depends on debt financing as compared to equity financing. Overall, the company has increased its debt burden in FY 2014 and its debt has increased dangerously high as 91.89 % of the company is funded by debt and mere 8.11 by equity financing. However, supplier’s cash position has improved, its assets are efficiently used, its net and gross profit margins have improved significantly but its debt burden over poses and threat in short term and long term, and in case of any decline in revenues, supplier will have to generate the short-term loans to pay off its creditors. Therefore, it is recommended that company should focus on decreasing its advantage position and increasing the lesser expensive shareholding to ensure stability and growth in the future.

Pre-qualification standards

The Primary Requirements of Prequalification are that the supplier must be a registered firm or business. This also involves the basic accordance with quality standards. This employs following of those standard regulations. The feedback is taken from the parties directly involved in trading with the above party. This checks suppliers Timeliness, responsive, caring, long-term orientation, satisfaction driven, future contracts, standardized service, valuation fairness, capability, prior connections and prion problemswith this supplier and the largest valuation of past contracts. Then It covers the policies of the supplier that are subject to its employees regarding racial discrimination, Equal Opportunity providing, recruitment mode and proper documentation along with health and safety standards present in the organization.

References

CIPS. (2014). The SME Engagement Handbook. Chartered Institute of Procurement and Supply. Retrieved June 26, 2015

CIPS. (2015). Retrieved June 25, 2015, from CIPS: http://www.cips.org/en/aboutcips/

Day, M. (2002). Gower Handbook of Purchasing Management. Gower Publishing, Ltd. Retrieved June 26, 2015, from CIPS: https://www.cips.org/Documents/Annual_report_accounts_2013.pdf

Lysons, K., Farrington, B., & Kenneth, L. (2010). Purchasing and Supply Chain Management. Pearson Education India.

Main, A. (2015, June 25). Retrieved June 25, 2015, from The Australian Review: http://www.theaustralian.com.au/business/supply-chain-remains-a-mystery-to-most-importers/story-e6frg8zx-1227413491775

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