Heavytruck's Financial Analysis
for the period from 04/01/2016 to 03/31/2018

1. Heavytruck's Financial Position Analysis

The analysis represented below on Heavytruck's financial state and activity efficiency is made for the period 04/01/2016–03/31/2018 based on the financial statements data prepared in accordance with standards generally accepted in the United States of America (US GAAP).

1.1. Structure of the Assets and Liabilities

According to the data given in the table, noncurrent assets were about two thirds of Heavytruck's assets (68%) on the last day of the period analyzed, while current assets took one third. The assets appreciably grew to USD 4,135,518 thousand (by USD 233,507 thousand, or by 6%) during the period analyzed (from 31 March, 2016 to 31 March, 2018). Assets were observed to grow simultaneously with equity. With that, the equity has grown with outrunning rates (+83.8% for the entire period reviewed). An outrunning growth of equity is a factor with positive influence on the financial stability of Heavytruck.

The increase in total assets of Heavytruck occurred due to the growth of the following asset types (amount of change and percentage of this change relative to the total assets growth are shown below):

• Inventory, net – USD 202,807 thousand (31.8%)
• Other long-term investments and receivables – USD 133,032 thousand (20.8%)
• Goodwill – USD 76,030 thousand (11.9%)
• Derivative instruments and hedges, noncurrent – USD 66,409 thousand (10.4%)

The most significant growth of sources of finance ("Equity and Liabilities") is seen on the following rates (the percentage from total equity and liabilities change is shown in brackets):

• Preferred & common stock (issued minus unissued) – USD 819,319 thousand (59.9%)
• Additional paid in capital – USD 228,809 thousand (16.7%)
• Accounts payable, current – USD 200,881 thousand (14.7%)
• Taxes payable, current – USD 93,578 thousand (6.8%)

The most significantly changed items on the balance sheet for the period reviewed (from 31 March, 2016 to 31 March, 2018) are "Property, plant and equipment, net" in assets and "Long-term debt and lease obligations" in sources of finance (USD -279,729 thousand and USD -436,211 thousand, respectively).

The inventory were USD 826,263 thousand on the last day of the period analyzed (03/31/2018), which significantly (by USD 202,807 thousand, or by 32.5%) exceeds the level on the first day of the period analyzed.

During the last two years, the current receivables moderately reduced (USD -10,003 thousand).

1.2. Net Assets (Net Worth)

On the last day of the period analyzed (03/31/2018), the net tangible assets equaled USD 1,578,362 thousand. During the period reviewed (31.03.16–31.03.18), the net tangible assets grew by USD 729,448 thousand, or by 86%. On 03/31/2018, the intangible assets equaled USD 112,051 thousand. This value shows the difference between the value of net tangible assets and all net worth.

The net worth of Heavytruck exceeds the stock capital by 23.1% on the last day of the period analyzed (03/31/2018). Such a situation is normal, the net worth (net assets) should not be less than the stock capital. Net worth is used as a measure of the company's book value (as opposed to a shareholder's value, the value based on expected earnings and other methods used to estimate the company's value). In financial analysis, amount of net worth (own equity) is one of the key indicators of property status of the company.

1.3. Financial Sustainability Analysis

1.3.1. Key ratios of the company's financial sustainability

The debt-to-equity ratio and debt ratio are the main coefficients describing financial stability. The ratios are similar in their meaning and indicate a relationship between two main sources of capital: equity and borrowed capital. The difference between the ratios is that the first one is calculated as a relationship of the borrowed capital (liabilities) to equity, while the second ratio is calculated as a relationship of the liabilities to the overall capital (i.e. the sum of equity and liabilities).

At the end of the period reviewed, the debt-to-equity was equal to 1.44. During the period analyzed (31.03.16–31.03.18), the debt ratio decreased by 0.17 from 0.76 to 0.59.

The value of the debt ratio relates to Heavytruck's good capital structure on 31 March, 2018 from the point of view of financial stability. The percentages of liability and equity are 59.1% and 40.9%, respectively. Despite the fact that at the beginning of the considered period, the value of the debt ratio did not correspond to the norm, later it became normal.

In the chart below, one can see the structure of the company's capital:

According to well known principles for stable company development, investments with the least liquid assets (noncurrent assets) should first be made with help from the most long-term sources of financing, i.e. with the help of own capital (equity). An indicator of this rule is the noncurrent assets to net worth ratio. On 31 March, 2018, the ratio equaled 1.66. For the last two years, the ratio decreased by 1.45. The value of the ratio can be characterised as an unacceptable one on 03/31/2018.

The current liability ratio shows that the share of short-term and long-term liabilities of total liabilities of Heavytruck equaled 42% and 58% respectively on 31 March, 2018.

The following chart shows the dynamics of the debt and current liability ratios of Heavytruck.

1.3.2. Working capital analysis

The working capital was equal to USD 299,897 thousand at the end of the period reviewed. For the period reviewed (from 31 March, 2016 to 31 March, 2018), the working capital climbed appreciably (USD +16,244 thousand). But if we compare working capital with inventory, it turns out that inventory is not covered with working capital in full on the last day of the period analyzed (03/31/2018) (deficit is USD 526,366 thousand). It is an abnormal situation which can be caused by one of two factors: a shortage of long-term sources of financing or warehouse inventory that is too large. The value of working capital is deemed to be optimal when it is not lower than inventory which is the least liquid component of current assets.

1.4. Liquidity Analysis

Liquidity related ratios are one of the most widespread indicators of a company's solvency. The current ratio shows the capacity of a company to meet current liabilities with all available current assets. Quick ratio describes solvency in the near future. Cash ratio shows if there is enough means for uninterrupted execution of current transactions. Current ratio, quick ratio and cash ratio for Heavytruck are calculated in the following table.

During the two years, it was observed that there was a a significant lowering in the current ratio to 1.29 (-0.08). The value of the ratio can be deemed as an unacceptable one at the end of the period analyzed. During the whole of the analyzed period, the current ratio kept a value outside the normal range.

During the period analyzed, the quick ratio dropped from 0.34 to 0.3 (-0.04). The value of the quick ratio is critical on 03/31/2018. It means that Heavytruck does not have enough liquid assets (cash and other assets which can be rapidly sold) to meet all their current liabilities.

Similar to the two previous ratios, the cash ratio has an unsatisfactory value (0.08) on the last day of the period analyzed that describes the lack of the most liquid assets in the company (cash and cash equivalents) to meet all current liabilities.

2. Financial Performance

2.1. Overview of the Financial Results

The table below tells us about the main financial results of Heavytruck's activities during the period analyzed (from 31 March, 2016 to 31 March, 2018).

The revenue grew from USD 52,644,823 thousand to USD 72,664,826 thousand (by USD 20,020,003 thousand, or by 38%) during the two years. The chart below demonstrates the change in revenue and net income (loss) including portion attributable to noncontrolling interest for Heavytruck. The gross profit equaled USD 14,836,643 thousand for the last year. For the entire period analyzed, the gross profit decreased notably (by USD 9,979,997 thousand, or by 40.2%).

For the last year, the company posted a gross profit and earnings before interest and taxes (EBIT), which was USD 13,421,522 thousand. The final net income (including portion attributable to noncontrolling interest) of Heavytruck equaled USD 7,750,339 thousand for the last year.

2.2. Profitability Ratios

The profitability ratios given in the table have positive values as a result of the profitability of Heavytruck's activities for the year 2017/18. During the year 2017/18, the gross margin was equal to 20.4%; it is 26.7% lower than for the year 2016/17.

Profitability calculated using EBIT (return on sales) deserves more attention. The return on sales was 0.18 or 18.5% per annum during the last year, while the profit margin was 10.7% per annum.

To assess the liabilities that the company should repay for the use of borrowed capital, an interest coverage ratio was calculated. The acceptable value is deemed to be not less than 1.5. In this case, the interest coverage ratio was 2.9 during the year 2017/18, which is evidence of Heavytruck's capability to pay interest on borrowed assets. It should take into account that not all interest payments are necessarily included on the income statement. In certain cases interest is included in investments in noncurrent assets and as a result it is not used to calculate the indicated ratio.

The return on assets was equal to 171.3% for the period from 04/01/2017 to 03/31/2018. During the whole period reviewed, the return on assets went down by 205.6%.

A key indicator of business profitability is the return of equity (ROE), i.e. return from money invested by the owners. The profitability of the owners' investments in Heavytruck's assets was 427% per annum during the year 2017/18. It is a high rate, but it is influenced not only with factors inside the company, but also the economic environment where the company is located (inflation rate, interest rates, etc).

The change in the main rates of return on assets and equity of Heavytruck is demonstrated in the following chart for the period analyzed.

2.3. Analysis of the Business Activity (Turnover Ratios)

To assess Heavytruck's business activity, the table below provides the main rates of turnover: receivables, inventory, current and total assets turnovers; accounts payable and capital turnovers of the company. Turnover ratios have strong industry specifics and depend on activity. This is why an absolute value of the ratio does not permit making a qualitative assessment. When assets turnover ratios are analyzed, an increase in ratios (i.e. velocity of circulation) and a reduction in circulation days are deemed to be positive dynamics. There is no well-defined interaction for accounts payable and capital turnover. In any case, an accurate conclusion can only be made only after the reasons that caused these changes are considered.

According to the above table, the average collection period (Days Sales Outstanding), calculated based on the data during the year 2017/18, was 3 days, while average repayment period for credit debts (Days Payable Outstanding) was 6 days. The data on asset turnover, on average, for the entire period analyzed, shows that Heavytruck gains revenue equal to the sum of all the assets every 27 days.

3. Conclusion

3.1. Key Ratios Summary

The most important indicators of Heavytruck's financial state and activity results are summarized below by using a qualitative assessment during the period reviewed (31.03.16–31.03.18).

The analysis discovered the following extremely good financial characteristics:

• high return on equity (427% per annum);
• return on total assets showed for the last year 171.3% per annum;
• the outrunning growth of equity relative to the total increments of assets.

Financial characteristics with acceptable values are indicated below:

• the percentage of liabilities in the total balance of Heavytruck is 59.1% which is normal for stable activity;
• the net worth is higher than the stock capital of the company;
• the income from financial and operational activities (net income, including portion attributable to noncontrolling interest) was USD 7,750,339 thousand during the year 2017/18.

There is one characteristic with a marginally acceptable value obtained during the analysis – earnings before interest and taxes (EBIT) showed USD 13,421,522 thousand during the last year, but it compares negatively with the previous value (USD -10,100,932 thousand).

Financial indicators with negative values are the following:

• the value of the noncurrent assets to net worth ratio (1.66) can be considered as an unacceptable one on the last day of the period analyzed;
• the current ratio (1.29) does not correspond to the normal criteria for this rate (2);
• the cash ratio is equal to 0.08 at the end of the period analyzed (a low cash in hand required for current payments);
• not enough long-term resources of financing of the company's activity (working capital is less than inventory).

We found only one characteristic with a critical value during the analysis – liquid assets (current assets minus inventory) are certainly not enough to meet current liabilities (quick ratio is equal to 0.3, while the acceptable value is 1).

3.2. Rating of the Financial Position and Financial Performance of Heavytruck

According to the analytical results given above, the following qualitative assessments were calculated: Heavytruck's financial position score is -0.66; the financial performance score during the period reviewed (31.03.16–31.03.18) is +1.52. According to the rating scale, it is CCC (unsatisfactory position) and AA (very good financial performance), respectively. These scores are obtained considering both key ratios at the end of the period analyzed and the dynamics of the rates, including their expected values for the next year. Based on these two scores, the final rating score of Heavytruck's financial condition was calculated. The financial condition was assessed at the BB rate (normal).

"BB" describes the financial condition of a company when the majority of ratios are normal. Companies with this rating should be considered as business partners who will need to be treated carefully when managing risks. These companies can lay a claim to obtain credit but a decision mainly depends on the analysis of additional factors (neutral creditworthiness).

4. Appendix

4.1. Bankruptcy Test

The Altman Z-score was calculated to predict the probability of the company's bankruptcy (a 4-factor model for a private non-manufacturer is taken for Heavytruck):

Discrimination ranges:

• 1.1 or less – “Distress” zone
• from 1.1 to 2.6 – “Grey” zone
• 2.6 or more – “Safe” zone

According to calculations, on 03/31/2018, the Z-score equaled 23.07 for Heavytruck. Such a value says about the insignificant probability of Heavytruck's bankruptcy.

Another bankruptcy forecast algorithm is Taffler Model, which has the following formula:

Z = 0,53X₁ + 0,13X₂ + 0,18X₃ + 0,16X₄ , where

Function values are interpreted as follows:

• Z less 0,3 – high probability of bankruptcy risk;
• Z more 0,2 – low bankruptcy risk.

Final score according to Taffler Model is 10.63. So there is a low probability of bankruptcy risk.

4.2. Calculation of the Final Rating of the Financial Condition

Final rating score for Heavytruck's financial condition: (-0.663 x 0,6) + (+1.52 x 0,4) = +0.21   (BB - normal)

Reference: Financial condition scale