Analysis Of The Techniques Of Determining Solvency In Manufacturing Industry
(A Case Study Of Nigerian Breweries Plc Enugu)
In the manufacturing industry, determining solvency involves employing various financial analysis techniques to assess a company’s ability to meet its long-term financial obligations. One fundamental method is the analysis of key financial ratios, such as the debt-to-equity ratio, interest coverage ratio, and current ratio. These ratios provide insights into the proportion of debt in the company’s capital structure, its ability to cover interest expenses, and the adequacy of short-term assets to cover short-term liabilities. Additionally, cash flow analysis is crucial for evaluating the company’s ability to generate sufficient cash to meet both operational and financial commitments. Examining the historical trends and comparing these metrics to industry benchmarks aids in identifying potential solvency risks and guiding strategic financial decisions within the dynamic landscape of the manufacturing sector.
This project will based on analysis of the techniques of determining solvency in the Nigerian manufacturing Industry. The project is undertaken to give actual background on An Analysis of the Techniques of determining solvency in any manufacturing Industry using Nigerian Breweries Plc Enugu as a case study.
This now makes necessary for the study to be divided into 5 (five) chapters. Chapter one, is an introductory aspect of the study. It contains items like the statement of the problem, objective of study, research Questions, significance of the study, scope limitations and delimitation’s.
Chapter two, this chapter is essentially made up of Review of related literature, where attempt is made to keep the readers abreast of the theories underlying subject matter.
Chapter three is on research design and methodology. This chapter tried to justify the method of data collection, method of data presentation which can be used in the research method.
Chapter four data presentation and analysis in the financial statement interpretation and ratio analysis in the financial statement interpretation and ration analysis.
Chapter five will deal with the finding, conclusions, Recommendations and Appendix
In the contemporary and ever dynamic business world, there has been an increasing shift in management concepts a shift in emphasis from production management to marketing management and now to management of resources at the firms disposal. Management now strive to achieve sound and stable financial standing by concentrating efforts on financial planning and control. The firm has to allocate its limited resources among alternative uses. If resources were unlimited, there would be no need for decisions, because all possible activities could be achieved. Scarce resources necessitate a choice, and the selection of one alternation implies the exclusion of others.
On this background therefore, the author intends to undertake a performance analysis of the Nigeria breweries Plc through the investigation of the success of the brewing industry. This would require the determination of solvency.
The major sources of data for this study will be the financial statement of the Nigeria Breweries Plc. This will be supplemented with questionnaire distributed to the senior and Junior staffs of the company.
The secondary source of data will be from different financial texts on solvency and liquidity related matters. Financial ratios (both short and long term) will constitute part of the analysis.
Further illustrations will be projected using tables, graphs and charts.
It is hoped that things the result of the finding will among other things serve the purpose of useful information source for the management of the Nigeria Breweries Plc indecision making. For students in your research work, and also for any other person undertaking a work on the techniques of determing solvency both as problem solving tool as well as an academic exercise.
Approval page III
Undertaking IX
Dedication IV
Acknowledgement V
Abstract VII
Table of content XIII
CHAPTER ONE:-
1.0 Introduction 1
1.1 Background of the study 1
1.2 Statement of the problem 3
1.3 Objective of the study 3
1.4 Research Question 5
1.5 Research Hypothesis 6
1.6 Significance of the study 6
1.7 Scope, Limitation and Delimitation 7
1.8 Definition of Terms 9
CHAPTER TWO:
2.0 Review of related literature 11
2.1 The concept of solvency 11
2.2 The legal concept of solvency 16
2.3 The concept of solvency as it relates to corporate failure 18
2.4 Test of solvency 20
2.5 Communication of financial information 27
2.6 The Balance sheet 29
2.7 Income statement 31
2.8 Objectives of the company 31
CHAPTER THREE
3.0 Research design and methodology 41
3.1 Research Design 41
3.2 Area of study 42
3.3 Determination of sample size 42
3.4 Population 43
3.5 Location of data 44
3.6 Method of data collection 45
3.7 Method of data presentation 47
3.8 Method of data Analysis 47
CHAPTER FOUR
4.0 Data presentation and analysis 49
CHAPTER FIVE
5.0 Findings, Recommendation and Conclusion 87
OTHER SEGMENTS
A. Bibliography 95
B. Appendix 98
INTRODUCTION
BACKGROUND OF STUDY
The Nigerian Breweries Plc was incorporated first, as Nigerian Breweries Limited on 16th November, 1946 and later as Nigerian Breweries Limited on the commencement of operations in a second breweries at Aba in 1957. In accordance with the companies and allowed maters Act of 1990, the name was again changed to Nigerian Breweries Plc, since the formal incorporation in 1946, 51 years have rolled by, 51momentous years that saw the company grow from its modest beginnings into the ground company that it is today. The company now has five Breweries from which their highly refreshing high quality brands are distributed to all the nooks and corners of this great country.
The company has kept pace with key international development, thus ensuring that their systems, processes and operational procedures are always in conformity with proven best practices in most parts of the world. This has been evident in the vision and professionalism demonstrated in the way the business ha been managed in the past 51 years. The company now has a portfolio of eight high quality brands, star and Gulder lagers Maltina Amstel Malt drinks and legend extra stout, Schweppes Bitter Lemon, Schweppes Tonic Water and Schweppers Soda Water, all the above improvements in the company would not have been possible with out the company being solvent.
The old business adage “you have got to have money to make money” is simply a recognition that most companies needs funds in order to operate profitably. The need for funds in a manufacturing company which Nigerian Breweries Plc is no exception affected by everything that happens to the company. While the amounts needed in this company is influenced by many factors and fluctuate over a period of time, this company have substantial investment in the current asset of stock, customers (debtors) and cash also in fixed assets such as building plants and equipment.
As a result of scare resources which is visible in almost all manufacturing companies, the assets disclosed on the balance sheet at any point in time are reflection of the cumulative investment decisions of management.
A weak liquidity position poses a threat to the solvency of the comparing and makes it unsafe and unsound. This company does not consider the use of the techniques for determining solvency very important and as such the only technique they use are as follows:-
(a) Total capital to total profit Assets and
(b) Dividends to profit after tax
What the company does most of the time is forecasting and assumption. The company is always interested in cash and upheld it as the best technique for measuring the companies solvency. As a giant, this company always meet up with their cash requirement. Their ratios for measuring solvency will be included in the study.
(David E.L 1981)
1.2 STATEMENT OF THE PROBLEMS
1. One of the important factor that has contributed much in drilling the activities of this company is liquidity problems and its attend and insolvency. At times the company find it difficult to meet up with their maturing financial obligations due to late arrival of funds.
2. The economic recession in the country and the political uncertainty have also aggravated this problem of liquidity and this has become a great concern to the company. A common issue in the board meeting of this company is how to survive through solvency.
3. With the increase in the activities of this company over the years, a critical look at the balance sheet of this company reveals a corresponding increase in the level of bad debts.
1.3 OBJECTIVE OF STUDY
(1) The objective of this study is to undertake a performance analysis of the Nigerian Breweries Plc towards finding, out the extent of their success or failure. This involved the determination of their solvency or liquidity position.
(2) An investigation would also be carried out into the possible areas of improving the solvency of the company for better performance and growth.
1.4 RESEARCH QUESTIONS
(A) Does your firm make use of any technique/methods in the determination of its solvency?
(B) What benefit does your firm device from its accumulated investments?
(C) When your firm runs short of cash, how does raise the required fund?
(D) Apart from ordinary shares, what are the other sources oif funds to the firm?
(E) How can the company be assessed considering the present economic situation in the country?
1.5 RESEARCH HYPOTHESIS
The following Hypothesis has been formulated to which the study will attempt providing answers.
Ho: The Nigerian Breweries Plc does not make use of any techniques/methods in the determination of its solvency.
HI: The Nigerian Breweries Plc makes use of techniques/methods in the determination of its solvency.
Ho: The Nigerian Breweries Plc does not drive any benefit from the accumulated investments of the industry.
HI: The Nigerian Breweries Plc make adequate benefit from the accumulated investments of the industry.
Ho : Apart from the ordinary share the Nigerian breweries Plc does not make use of other sources of fund.
HI: Apart from the ordinary share the Nigerian Breweries Plc makes use of other sources of funds.
1.6 SIGNIFICANCE OF THE STUDY
After carrying out the study, the researcher will be in a position to establish the solvency position of the Nigerian Breweries Plc. The reason for their success or failures, solvency or insolvency must have discovered, and this will help the researcher put up recommendation for improvement.
These recommendations will be of much significance to:
(1) The management of the Nigerian Breweries Plc in their decision making
(2) Students in their research work
(3) Any other person undertaking a work on solvency both as a problem solving tool as well as an academic exercise.
(4) To any other person especially students on how to make proper use of techniques such rations in determining the solvency of any company.
1.7 SCOPE LIMITATIONS AND DECILITATIONS
The researcher encounted a lot of problem in the course of this work (study), which nearly frustrated his effort in achieving meaningful result.
One of the most striking thing that could have frustrated my carrying old this work was dearth of information in this company. Getting into the companies company took a week before the actual problem began which is seeing the Brewing accountant, who latter rendered some help. I was not given 100% help as required due to what they called company’s secrecy. I was just helped for the sake of academic exercise and at last when I was fully understood by the management team of the company, I was given some help which I consider adequate for this work.
TIME/COST: The researcher was also constrained to use only one company as case study (Nigerian Breweries Plc) which is relatively small, instead of the six quoted Breweries in the country because of time/cost functions. The researcher still believe that the bigger the sample the better the result.
1.8 DEFINITION OF TERMS
1. Solving: State of being solvent, that is having enough money to pay your debts.
2. Liquidity: In banking perspective, this simply means being able to meet every financial commitment (BROWN C. 1940)
3. Techniques: By this I mean the various way of finding whether a company can be able to meet its current liabilities with current asset or whether a company could be able to pay its debt.
4. Total capital to total profit after tax and dividend to profit after tax are both techniques used in measuring solvency.
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Techniques Of Determining Solvency In Manufacturing Industry:
Determining solvency in the manufacturing industry involves assessing a company’s ability to meet its financial obligations, both short-term and long-term. It is crucial for stakeholders, including investors, creditors, and management, to evaluate solvency to make informed decisions. Several techniques and financial ratios are commonly used to analyze solvency in the manufacturing sector:
- Debt to Equity Ratio (D/E Ratio): This ratio compares a company’s total debt to its shareholders’ equity. A lower D/E ratio suggests lower financial risk and better solvency. Manufacturing companies with high D/E ratios may struggle to meet debt obligations.D/E Ratio=Total DebtShareholders’ Equity
- Interest Coverage Ratio: This ratio assesses a company’s ability to cover its interest expenses with its earnings before interest and taxes (EBIT). A higher interest coverage ratio indicates better solvency as it suggests the company has more income available to service its debt.Interest Coverage Ratio=EBITInterest Expenses
- Current Ratio: This ratio measures short-term solvency by comparing a company’s current assets to its current liabilities. A ratio greater than 1 indicates that the company can cover its short-term obligations.Current Ratio=Current AssetsCurrent Liabilities
- Quick Ratio (Acid-Test Ratio): Similar to the current ratio, the quick ratio assesses short-term solvency, but it excludes inventory, which can be less liquid. It provides a more conservative measure of a company’s ability to meet short-term obligations.Quick Ratio=Current Assets – InventoryCurrent Liabilities
- Debt Service Coverage Ratio (DSCR): This ratio is crucial for manufacturers with significant debt obligations. It measures the company’s ability to meet both principal and interest payments on its debt.DSCR=EBITDATotal Debt Service
- Cash Flow Analysis: Examining a company’s cash flow statements can reveal its ability to generate cash and meet financial obligations. Positive operating cash flow is a sign of solvency, as it indicates that the company can cover its day-to-day expenses.
- Working Capital Analysis: Analyzing changes in working capital over time can help assess short-term solvency. A decreasing working capital may indicate potential liquidity problems.
- Debt Maturity Profile: Evaluating the maturity dates of a company’s debt can provide insights into its ability to meet long-term obligations. A concentration of debt coming due in the near term could be a solvency risk.
- Credit Rating Analysis: Reviewing credit ratings assigned by rating agencies can provide an external assessment of a company’s solvency. Higher credit ratings suggest better creditworthiness and solvency.
- Altman Z-Score: Developed by Edward Altman, this formula combines multiple financial ratios to predict bankruptcy risk. A low Z-Score may indicate lower solvency.
Z-Score=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5
Where:
- X1 = Working Capital / Total Assets
- X2 = Retained Earnings / Total Assets
- X3 = Earnings Before Interest and Taxes (EBIT) / Total Assets
- X4 = Market Value of Equity / Total Liabilities
- X5 = Sales / Total Assets
These techniques and ratios provide a comprehensive view of a manufacturing company’s solvency, covering both short-term and long-term financial health. It’s essential to consider these metrics in combination and over time to make informed decisions about a manufacturing company’s financial stability.