Case study: Creditworthiness of Plutegroup
Plutegroup is one of the largest homebuilders in the U.S. The company is based in the state of Georgia and is ranked as the third-largest home building corporation in the U.S. The ranking was arrived based on the numerous houses that the company has constricted. For instance, in 2019, the company had managed to construct over seven hundred and fifty homes. The firm operated under the home construction industry and was established in 1956. It has constructed over twenty-three thousand houses as of 2018. Pulte Bill founded it. It has provided employment to over five thousand employees in the United States and its environs. The main activities of Plutegroup include land acquisition, land development for both residential and commercial motives. In the last three years, namely 2017, 2018, and 2019 the company managed to generate a revenue of 98 percent each year through the selling of constructed houses to potential home buyers. Some of the main brands offered by Plutegroup include DeVito homes, Del Webb, Centex, among others. Although the company has managed to make substantial revenues through the construction and selling of residential properties, the company has been facing stiff competition and other macro-economic challenges that have been slowly cutting down its revenues. Over recent times, the U.S Market has been fragmented by numerous property developers and home builders, which has significantly reduced the market share for Plutegroup. In addition, changes in inflation, GDP, and rates have also had adverse implications on demand for houses among the U.S residents. Therefore, the paper provides an analysis of Plutegroup to determine whether to accept or reject a loan application of $800 million by Plutegroup.
Examination of Company Financial Condition
The use of financial ratios helps to examine whether to accept or reject the $800 million loan application by Plutegroup. Financial ratios are essential tools that aid decision making. They are used by banks and other financial institutions to assess whether the loan applicant has adequate capacity to meet loan obligations. Some of the three categories of financial ratios that were utilized to examine whether to offer an $800 million loan to Plutegroup include profitability, liquidity, and leverage ratios.
Profitability
Profitability ratios measure the ability of the firm to generate profits. Among the key profitability ratios include net profit margin ratio, Return on Assets, and return on equity, among others. The net profit margin ratio measures the ability of the firm to pay all its cost of sales and still make some profits. The higher the net profit margin, it is an indication that the company is able to generate more revenues to cover its cost of sales. On the contrary, ROA is a measure of the firm ability to use its fixed assets to generate profits. A firm that has a higher ROA is a clear indication that such a firm is utilizing its assets property to generate more profits for the company. The return on equity is also abbreviated as the ROE is measured of the firm ability to generate income using each amount of funds or dollar invested by the shareholders. Investors prefer a firm that has a higher ROE because they are assured they will get value for their money. The table below indicates the profitability ratios for Plutegroup from 2017 to 2019.
2017
2018
2019
Net Profit margin
5%
10%
10%
ROA
4.62 %
10.05 %
9.49 %
ROE
23%
28%
25%
Source: (CSI Market, 2020).
Based on the above data, it is evident that the net profit margin ratio rose from 5 percent to 10 percent in 2018 and remain at 10 percent in 2019. The results suggest that Plutegroup was able to generate adequate revenues, but over recent times, its revenue streams have stayed stagnant. Also, looking at the ROA, it is clear that in 2017 the firm has a ROA of 4.63 percent, but it rose to 10.05 percent in 2018 before declining to 9.49 percent in 2019. Such a decline is a clear indication that the company is not utilizing its fixed assets efficiently to generate more profits. Similar trends were observed as the return on equity ratio declined from 28 percent to 25 percent in 2019. The overall profitability ratios indicate that the Plutegroup has been declining, and hence, the financial institution should consider rejecting its $800 million loan application because there is a lot of uncertainty about their future ability to generate profits.
Liquidity
The liquidity ratios measure the ability of the entity to meet its short term loan obligations. Among the two liquidity ratios that were utilized in assessing whether to accept or reject an $800 million loan application by Plutegroup include current and quick ratio. The current ratio measures whether the firm has adequate ability to meet its short term credit obligation. The quick ratio tends to be more refined as it measures the strength of the firm to pay its short term loan abolition. It tends to be more elegant as it eliminates marketable securities and inventories in assessing the firm liquidity levels. The table below indicates the liquidity ratio for 2017, 2018, and 2019.
Ratios
Years
2018
2019
2018
2019
Current ratio
Current asset
1,133,700
1,251,456
4.5
4.3
Current Liabilities
254,624
294,427
Quick Ratio
Current assets-inventories
1,133,700
1,251,456
4.5
4.3
Current Liabilities
254,624
294,427
Based on the information and data in the above table, it is evident that the current ratio decreased from 4.5 to 4.3. Similarly, the quick ratio also declined from 4.5 to 4.3. The data suggest that the ability of Plutegroup to pay its short-term debt has been declining, and hence, the firm may not be in a position to repay a higher loan. Therefore, an investment of 800 million by Plutegroup should be rejected.
Leverage ratios.
The ratio measures the proportion of debt and equity within the firm capital structure. A careful decision should be made to prevent having so much debt and too much equity within the firm capital structure. The debt to equity ratio below shows the Plutegroup performance over the last three years
Years
2017
2018
2019
Debt-to Equity Ratio
0.83
0.7
0.58
It is evident that the debt to equity ratio has been declining, which indicates that the firm is not highly levered, and hence it may qualify for a loan, but careful consideration must be taken before advancing the loan.
Nature and amount of assets and liabilities
Plutegroup’s total assets have been increasing as its total liabilities declined, as shown in the table below.
Years
2018
2019
Total Assets
$10,172,976
$10,715,597
Total liabilities
$5,355,194
$5,257,417
Source: (Sec, 2019).
In 2018 the total assets were $10,172,976 and rose to $10,715,597 in 2019. The results suggest that the firm financial health has been improving over the last two years
Analysis of cash flow trends and sources of earnings
The graph below indicates cash flow trends for Plutegroup from 2017 to 2018. The trend was rising in 2019, as shown in the graph below.
Based on the graph above, it is crystal clear that the Plutegroup cash flow trends have been rising but at a lower margin.
Accept or reject
From the above analysis, it is evident that over the last three years, the Plutegroup profitability levels have been declining. Similarly, its liquidity and leverage level has also been declining. However, firm cash flow trends have been rising. Based on the analysis, it would be prudent to reject offering them a loan of $800 million until the firm portrays the ability to honor its shorty term credit obligation as well as enhance their profitability.