Analysis Of The Techniques Of Determining Solvency In The Manufacturing Industry
(A Case Study Of Nigerian Breweries Plc Enugu)
In the manufacturing industry, assessing solvency involves employing a range of strategic financial techniques to gauge the company’s ability to meet its financial obligations. One fundamental method is ratio analysis, where metrics like the debt-to-equity ratio, current ratio, and quick ratio are scrutinized to evaluate the proportion of debt to equity, as well as the company’s liquidity position. Additionally, cash flow analysis plays a crucial role, examining the inflow and outflow of cash to ascertain if the company generates sufficient cash to cover its expenses and debt repayments. Furthermore, trend analysis over time helps identify patterns in financial performance, offering insights into the company’s long-term solvency prospects. Stress testing, another effective technique, involves simulating adverse scenarios to assess the company’s resilience in challenging economic conditions. By integrating these methodologies, manufacturing firms can gain a comprehensive understanding of their solvency status and make informed financial decisions to sustain operations and foster growth.
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 inluenced 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.
Determining solvency in the manufacturing industry is essential for assessing a company’s financial health and its ability to meet its long-term obligations. Solvency measures a company’s ability to cover its debts and continue its operations in the long run. Here are some techniques and financial metrics commonly used to determine solvency in the manufacturing industry:
- Debt-to-Equity Ratio (D/E):
- This ratio compares a company’s total debt to its shareholders’ equity. A lower D/E ratio indicates lower financial risk and stronger solvency. In manufacturing, where capital investments are substantial, a healthy D/E ratio is crucial.
- Interest Coverage Ratio:
- This ratio measures a company’s ability to meet its interest payments on outstanding debt. It’s calculated by dividing earnings before interest and taxes (EBIT) by interest expenses. A higher interest coverage ratio implies better solvency.
- Current Ratio:
- The current ratio assesses a company’s short-term solvency. It’s calculated by dividing current assets by current liabilities. A ratio greater than 1 indicates that the company can meet its short-term obligations. However, a very high current ratio might suggest inefficient use of assets.
- Quick Ratio (or Acid-Test Ratio):
- This is a more stringent measure of short-term solvency as it excludes inventory from current assets. It’s calculated by subtracting inventory from current assets and then dividing by current liabilities. A ratio above 1 suggests that the company can cover its short-term obligations without relying on selling inventory.
- Cash Flow Ratios:
- Analyzing a company’s cash flow is crucial for assessing solvency. The Cash Flow to Debt ratio, for example, compares the cash flow from operations to total debt. A higher ratio indicates better solvency.
- Debt Service Coverage Ratio (DSCR):
- DSCR is used to assess a company’s ability to service its long-term debt. It’s calculated by dividing cash flow available for debt service by the total debt service (principal and interest payments). A DSCR above 1 indicates that the company can meet its debt obligations.
- Asset Turnover Ratio:
- This ratio measures how efficiently a company uses its assets to generate sales. A higher asset turnover ratio can contribute to solvency by generating more revenue from the same amount of assets.
- Profitability Ratios:
- While not directly measuring solvency, strong profitability can contribute to it. Metrics like Return on Assets (ROA) and Return on Equity (ROE) indicate how effectively a company generates profits from its assets and equity, respectively.
- Debt Maturity Profile Analysis:
- Understanding when a company’s debt is due is crucial. A well-balanced debt maturity profile ensures that a company doesn’t face a sudden influx of debt payments, which can strain its solvency.
- Credit Ratings:
- External credit rating agencies provide credit ratings for companies. These ratings reflect an independent assessment of a company’s solvency and creditworthiness.
- Scenario Analysis and Stress Testing:
- Manufacturing companies can also assess solvency by conducting scenario analyses and stress tests to understand how the business would perform under adverse conditions.
Remember that financial analysis should be comprehensive and consider industry-specific factors. It’s also essential to compare a company’s metrics to industry benchmarks and historical performance to get a more accurate picture of its solvency. Additionally, working with financial experts or consultants can provide valuable insights into a company’s financial health and solvency.