Unit 02 · Case
Adom Fresh Foods
Diagnosing a Business with Ratios · Ghana · GH₵
This is the student brief. The instructor guide is distributed separately.
Downloads
You work in the corporate credit team of a Ghanaian commercial bank.
Adom Fresh Foods Limited has been a customer for six years. It distributes fresh produce from farms in the Eastern and Ashanti regions to hotels, hospitals, and supermarkets across Greater Accra and Kumasi. It is owned and run by two siblings, Ama and Kwesi Boateng.
The bank holds a GH₵5.0 million overdraft facility and GH₵11.5 million of term debt.
Over the past three quarters Adom has missed three scheduled instalments on the term loan. Each was made good within a fortnight, but the pattern has triggered a review. The relationship manager's file note reads: "Revenue has doubled in three years. Owners insist the business has never been stronger. Cannot reconcile this with the payment record."
Your credit committee meets tomorrow. The facility comes up for renewal in six weeks.
Exhibit 1 · Adom Fresh Foods, three years
| GH₵ millions | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Revenue | 40.0 | 60.0 | 80.0 |
| Cost of goods sold | (34.0) | (51.0) | (68.0) |
| Operating overhead | (4.0) | (6.0) | (8.0) |
| Operating income | 2.0 | 3.0 | 4.0 |
| Interest | (0.4) | (0.8) | (1.2) |
| Net income | 1.20 | 1.65 | 2.10 |
| Total assets | 15.0 | 23.0 | 34.0 |
| Total debt | 5.0 | 9.4 | 16.5 |
| Owners' equity | 6.3 | 8.0 | 10.0 |
Exhibit 2 · Ratios — Years 1 and 2 computed for you
| Ratio | Year 1 | Year 2 | Year 3 | Peers |
|---|---|---|---|---|
| Return on equity | 19.1% | 20.6% | ? | 17% |
| Net profit margin | 3.00% | 2.75% | ? | 2.6% |
| Asset turnover | 2.667 | 2.609 | ? | 2.5 |
| Leverage (assets/equity) | 2.381 | 2.875 | ? | 2.6 |
| Days sales outstanding | 30.1 | 45.0 | 60.2 | 32 |
| Days inventory | 30.1 | 40.1 | 49.9 | 30 |
| Days payable | 39.7 | 40.1 | 40.3 | 43 |
| Cash conversion cycle | 20.5 | 45.0 | 69.8 | 19 |
| Times interest earned | 5.00 | 3.75 | 3.33 | 5.0 |
| Current ratio | 1.617 | 1.728 | 1.840 | 1.6 |
Question 1 · 15 minutes
Complete the four blank cells: Adom's Year 3 return on equity, net profit margin, asset turnover, and leverage.
Check that the three drivers multiply to the ROE. If they do not, find the error before moving on.
Question 2 · 13 minutes
The relationship manager cannot reconcile a doubling of revenue with three missed payments. Reconcile it for him.
Your answer must explain two things that look like good news and are not: the rising return on equity, and the rising current ratio.
Question 3 · 9 minutes
Three options are on the table at the credit committee. Renew the facility as it stands. Renew it with conditions. Call the debt.
Choose one, and state the single piece of information you would most want before the committee votes.