Question 5

1. Profitability= Profit before tax/revenue= -10878/46920= -23.2%

2. Working capital = current asset-current liabilities=£333839-£81775 = £252064
3. Current ratio= current assets/current liabilities=£333839/£81775=4.08
4. Liquidity (quick/acid test) ratio= (current assets-inventory)/current liabilities= (£333839-
0)/£81775 = 4.08
5. Equity ratio = long term debt/share capital and reserves = (£301,378/£288,136) x 100 = 104%
6. The ROCE has several limitations.
1. In does not take into account the time value of money
2. It does not take into account the period in which the revenue was made. It basically
ignores the timing of money
3. It uses profit rather than revenue. Profit is more susceptible to manipulation
7. This appears to be a company currently performing poorly in terms profitability but at the
same time possessing a huge amount of asset. In terms of its profitability it is currently
operating at 23.2 % loss for every revenue made. This may be attributed the high staff
related cost and operating expenses or inadequate revenue generated from operations. In
addition to the losses made the equity ratio is extremely high due to the significant amount
of long term loans the company owes. This put the transportation operator in a risky
position because if the company continues to make losses then financing the debts would
outweigh the revenue and therefore the business will be at risk of administration.

On the other hand, the business currently possesses relatively are amounts of assess in
relation to its liabilities e.g. the current ratio is 4.08. The high current ratio is due to high
account receivables. This may be a good sign for the transport operator for future years as
long as the company does not encounter significant difficulties getting paid their receivables.

Question 6

a. Explain the concept of “creditworth”.

15 marks

b. Using a project finance typical SPV Organogram (see Handouts on Moodle) state why it’s
important to understand the “creditworth” of each of the Client, the
Sponsors/Developers, the D&B contractor, his supply chain and subcontractors, and the
Operations contractor(s) etc.
see the Handout - SPV Organogram to help you answer this

15 marks

c. Who are the [key] advisers? Are there any conflicts or pitfalls for parties to be wary of in
appointing advisers?