Given your answers and analysis in Questions 1 to 4, what is your final recommendation to Meridian Banking Corporation: an approval or denial of the loan to each and/or both firms? Discuss the basis for your recommendation. Note: Ensure you base your recommendation only on the change in the ratios for the two stated financial years (i.e. 2018 and 2019).

Answers for questions 1 to 4 are below:

QUESTION 1

Zenith Energy Limited (ZEN)

Zeniths Energy Limited's debt position from 2018-2019 has increased indicating an increase in borrowing presented through the calculations below which means the company has more liability than assets.

Debt Ratio

2018: 51,862,000.00 / 96,418,000.00 = 0.54

2019: 107,009,000.00/ 179,395,000.00= 0.596499345

Also as presented below a decrease on interest expenses from 2018 to 2019, means the company is burdened by debt expenses.

Interest coverage ratio

Ebit/ interest expense

2018: 14,130,000.00/ -2,153,000.00=-6.562935439

2019: 12,533,000.00 / -3,950,000.00= -3.172911392

Contact Energy Limited (CEN)

Contact Energy Limited's debt position from 2018-2019 has decreased indicating a decrease in borrowing, presented through the calculations below which means the company has more assets than debt. This ratio aids in determining risks Contact Energy may face. However, it is evident through these calculations that this company has a low risk.

Debt Ratio

Total liabilities/ Total assets

2018:2,369,989,911.00/ 4,871,136,384.00= 0.486537375

2019: 2,076,084,878.00/ 4,735,232,269.00= 0.438433589

Presented below is an increase on the interest expenses in 2019 compared to 2018. This demonstrates that contact energy limited are more prone to bankruptcy due to their inability to manage the businesses debt accurately.

Interest Coverage Ratio

2018:217,371,365.00/ -77,960,194.00= -2.788235301

2019:288,663,735.00/ -70,732,173.00= -4.081081109

QUESTION 2

The Zenith (ZEN) and Contact Energy Companies (CEN) have both experienced shifts in their gross, operating and net profit margins from 2018 - 2019. Indicated in the table (annexure 1), is the financial data obtained from both public companies, which can then be utilised to create gross, operating and net profit margin ratios. Below is the detailed analysis of these profit margin ratios on the two companies, with explanations based on the data on how the businesses have controlled costs from 2018 -2019.

Zenith Energy Limited (ZEN)

ZEN has managed to increase their gross profit margin from 55.64% in 2018 to 56.99% in 2019. This indicates that the firm has increased their profit margin by mark-ups on their products (Titman, et al. 2020), which could have derived from obtaining discount on their goods sold from the wholesaler or increasing their retail prices.

The management at ZEN have decreased their operating profit margin from 2018 to 2019 by 4.66% indicating that they are not controlling their operating costs as effectively in 2019. This displays that management have allowed for an increase in operating expenses between the financial years. Increased operating expenses such as rent, payroll etc. could have contributed to this increase in the operating profit margin.

Finally, the net profit margin at ZEN has decreased from 16.43% to 10.54%, which is a reduction of 5.88%. Evidence in the financial statements has indicated that the company has increased the amount of interest and tax paid from 2018 to 2019. This means that the business has possibly invested in property, borrowed money or paid more tax. As mentioned above, the operating profit margin has decreased along with the net profit margin in the 12-month period. This may have been due to the company investing in property (long-term assets) and therefore the maintenance costs may have contributed to the increase in operating costs, and affected their net profit as they are paying more tax and interest. The ZEN Company is not effectively controlling costs in 2019 compared to 2018.

Contact Energy Limited (CEN)

Through the gross profit margin (GPM) analysis of Contact Energy Limited (CEN), it is evident that the business has managed to increase their GPM by .82% from 2018 - 2019. This indicates that they have increased their retail pricing and/or received a discount on their cost of goods sold (COGS). Controlling gross profit costs at CEN is clearly improving year on year.

The CEN Company has managed to increase their operating profit margin (OPM) from 10.96% in 2018 to 12.23% in 2019, leading to an increase of 1.27%. The CEN Company has successfully controlled costs in 2019 to see a rise in the OPM, a reduction in operating costs would have contributed to this result in 2019.

The net profit margin (NPM) at CEN has also increased in 2019, from 5.18% to 6.6%. This increase of 1.42% is exceptional as the NPM at the CEN Company is the largest increase of all the profit ratios in 2019. This leads to the assumption that they have reduced their interest and tax paid in 2019; this may be due to using their assets and investments more productively.

QUESTION 3

Zenith Energy Limited (ZEN)

As seen in appendix 2, ZEN was able to generate 7.02% more in sales during 2018/2019 Financial year. ZEN both Total Asset and Net Property Plant and equipment have made significant increases. Total asset by 86.06% and its Net property plant and equipment by 95.07%

Although ZEN were still able to increase its Sales, the company has made significant fixed asset acquisition relative to its sales. Although ZEN's Total asset turnover has decreased by 0.22 and its Fixed asset turnover by 0.31, By increasing their non-current assets it may indicate that the company is planning to invest long term assets in order to generate more sales within the far future.A significant decrease in both its ratios may not truly indicate that the company is utilizing its assets to generate sales. This needs to be analysed in the following years to demonstrate a clear picture of the company's performance.

Contact Energy Limited (CEN)

As seen in Appendix 2, CEN was able to generate 18.35% more in sales during 2018/2019 Financial year. Total Asset has decreased by 2.79% whilst increasing its Net Property Plant and equipment by 1.10%.

CEN has managed to generate more sales relative to its total asset. Thus, indicating that the company has held off in asset acquisitions and focuses their attention more within cash inflow with Sales. Their data shows that the company has not made significant changes within its assets. Rather it focuses on generating sales than purchasing more assets. By increasing both its Total and Fixed asset turnover, the company was able to utilize its assets efficiently to generate sales.

QUESTION 4

In Both Companies, CEN and ZEN Gross profit margin has been increasing from 2018 to 2019.CEN Profit margin has been inclined from 30.98 per cent to 31.45 per cent from 2018 to 2019 and ZEN had the result of 55.51 in 2018 and 56.91 in 2019.

The improvement in CEN company can be a result of a combination of price increases and/or cost control. However, here there is no benchmark to show the effectiveness of this result compared to a competitor company or industry standards or at least a long record of the company's operation and history, but we can see that there was an improvement in the period of 2 years for both of the companies.

The increase in operating profit from 11.01 per cent in 2018 to 12.35 per cent in 2019 for CEN shows a healthy and stable increase in generating sales and operating profit for the company.

However, the decline in operating profit from 27.47 per cent in 2018 to 22.77 per cent in 2019 of ZEN can be a result of operating leverage. Sales, Gross profit and operating profit show that management is able to generate revenue, but the problem is an increase in operating expense. Management should try to increase efficiency and reduce costs, including personnel expenses but not in a way to decrease the revenue.

In the CEN company we have a pretty stable increase in return on equity from 4.11 to 5.86 in the period of two years for shareholders.

A significant increase in operating profit and return on equity means the business has kept more profit for shareholders and still able to manage the costs, operations and pursue potential shareholders to invest in their company.

On the other hand, ZEN issued many shares in the two-year time, but still had difficulty controlling the expenses, resulting in a significantly less Net profit.

It seems that ZEN's management is failing to manage its assets into investments and generating profit from it to be able to cover the costs of their debt.