O-Net Communications- Credit Analysis Report Student`s

O-NetCommunications- Credit Analysis Report

Backgroundand character

O-NetCommunications Ltd. was established in October 2000 as a foreignenterprise that incorporate high technology. The company isregistered in the stock exchange of Hong Kong since April 2010 with astock code 877 (O-NetCommunication annual reports, 2014).O-Net Communications has taken a leading position in the industry oftechnology including optical networking, touch panel, and automationindustry. The company is the main supplier of optical networkingcomponents subcomponents and systems that are known for their highspeed and efficiency. The quality of services offered by the firm isa good grantee of good performance, and the company has maintained adesirable competitive advantage in the industry. The financialanalysis has also proved that the firm is financially stable as ithas been capable of maintaining a good profitability level. However,the company would wish to acquire more funds to finance the expansionof its services. In assessing the credit analysis of the firm,financial data of the company for the year 2014 has been used.

Industryand profitability analysis

Inanalysing the profitability of the company, the analyst has used thefinancial profitability ratio. This is quantitative measures used tocompare the level of profit to the level of sales and assets investedin by the firm. The higher the ratio, the more profitable a businessis. In this case, three major ratios have been used to assess theprofitability of the firm. These are gross profit margin, net profitmargin, return on investment (ROI) and return on equity (ROE). Theseratios have also been compared with the average ratios in theindustry as provided in the cross-industry analysis data. The tablebelow shows the profitability analysis of O-Net Communications forthe financial year 2014.

Profitability measure

Formula

Ratio

Average ratio (industry)

Gross profit margin

34.75%

12.65%

Net profit margin

× 100

5.21%

6.2%

ROI

2.8%

N/A

ROE

6.15

4.5%

Fromthe above profitability analysis we have seen that O-NetCommunications is capable of generating more profit from it salesthan compared to other firms in the industry. The gross profitmargin, for example, is much higher than that of the average firms inthe same industry. O-Net Communications has a gross profit margin of34.75% while that of the average industry was measured at 12.65%.However, this gross profit margin is reduced by the company’soperating expenses. The firm has a lower net profit margin than thatof the industry and it is assumed that the profit generated from thesales is reduced due to lack efficiencies within the operations ofthe company. If the company can consider investing in modern plantsand equipment, it can be capable of attaining high profitabilitymeasures.

Efficiencyand liquidity analysis

Thisanalysis shows the ability of the firm in meeting its short-termobligations as they become due to. Liquidity ratios have been used inthis analysis. These ratios include current ratio and quick ratio,and they were as shown below (Yahoo Finance, 2015).

liquidity measure

Formula

Ratio

Average ratio (industry)

Current ratio

3.69x

2.46x

Quick ratio

2.76x

N/A

Theliquidity ratios of O-Net Communications have also proven that thefirm is capable of meeting its current obligations as they fall due.

Risk,leverage and red flags

Riskanalysis

Theidentified risks in the company included Market/industry risk,economy risk, customers risk, suppliers’ risk and production risk.With the current high economic growth in Hong Kong, there has been adrastic increase in the sales in the industry. There is, therefore, ahigher risk in ascertaining the accuracy of the budgeting process.The company has also been unable to meet the demand of its customersand therefore, O-Net Communications might be at high risk of losingits market share. Lack of adequate production capacity has forced thecompany to outsource some factors of production. One of the majorchallenges of outsourcing is the quality risk control within theorganization. In mitigating these risks, the company has obtained aninsurance policy to cover for the transferable risks. The firm hasalso invested in research and development that will help isidentification and management of risk. The company also maintainsquality assurance measure to minimize production risks.

Leverageanalysis

Theanalysis of the capital structure showed that O-Net Communications isnot highly levered. The debt to equity ratio which is calculated asthe long-term debt divided by the shareholders equity. However, thisanalysis was not applicable because, since the year 2012 to date, theO-Net Group had did not have any borrowings. The company is nowapplying for a loan of HKD 264,296 which is equivalent to 20% of thenet current assets so as to finance expansion our operations and addmore plants and equipment to improve on its efficiency.

CorporateGovernance

Corporategovernance refers to the various ways by which firm are conducted toensure accomplishment of the future intended goals and objectives.The management should ensure that every decision made is directedtowards the accomplishment of one common goal. The directors ofOn-Net Communications has developed a corporate governance committeethat ensures that the management adheres to the professionalstandards.

O-NetCommunications adopts the policies and provisions set in thecorporate governance report and codes as set in Appendix 14 of therules governing the corporations listed in Security Exchange of HongKong (SEHK) (O-NetCommunication annual reports, 2014).The audit report of the financial year also confirmed that thecompany adhered to provisions of corporate governance code underarticle A.2.1. The responsibilities of the Chief executive officerand the chairman are kept separate, and they are undertaken by twodifferent individuals as it is provided in the CG code. However, thecompany ensures consistent in leadership by involving the CEO Mr. NaQinglin to act as the Co-Chairman. The Board has come up withstrategies to ensure that there is a balance of powers.

Overallcomment and conclusion

Fromthe above analysis, it has been confirmed that there is a need forextra capital for O-Net Communications. The liquidity analysis hasshown that the company is capable of repaying back the loan and theyearly interest. The firm has a current ratio of 3.69 times which iseven higher than the recommended ratio on 2. This current ratio showsthat the company will be able to pay the interests payable for theloan. The profitability of the firm is also high, and it means thatthe firm is capable of generating high profit from its sales, and itis utilizing the assets in making a profit. Also, the It is alsoexpected that the additional capital will help the firm in boostingits profitability level. O-Net Communication also adheres to theprovisions of corporate governance. Therefore, as the analyst, I canconclude that the firm is worth the loan.

References

O-NetCommunication annual reports (2014). Retrieved 10 November 2015.From. http://www.aastocks.com/en/stocks/analysis/company-fundamental/balance sheet?symbol=00877

YahooFinance. (2015). Industry Browser.Retrieved 10 November2015. From. http://biz.yahoo.com/p/841conameu.html