Blue Power Group Limited Lending Project

The University of Technology, Jamaica

An Analysis of the Blue Power Limited

2014/2015 Financial Reports
And a Determination of its Credit Worthiness

Name of course: Lending

Lecturer/Tutor: Mr. Williamson
Date: July 21, 2015

Group Members Names and Identification Numbers:

Cidnie Dixon 1202051
Christina Shaw - 0704202
Korie Hyde - 1102595
Natalie Richards-Miller - 1205568
Tashane Amos - 0908041

Blue Power Group Limited Lending Project

Introduction
This project serves as a part of the final grade for the Lending course offered at the University Of
Technology, Jamaica. The purpose of this assignment is to give students the opportunity to apply
practical knowledge of the various topics that were explored throughout the course, to a
Jamaican company (specifically one that is listed on the Jamaican Stock Exchange).
As aspiring loan officers we were given the task to analyze the credit worthiness of Blue Power
Group Limited with a view of possibly offering credit facilities of Jamaican thirty million
dollars ($30,000,000). In assessing the companys credit worthiness its 2014-2015 financial
statement was audited, analyses on a series of companys publications alongside usage of
financial techniques and tools were used to acquire the necessary information to arrive at a
decision. Explicit attention will be placed on the companys:

Historical performance

Future Prospects

S.W.O.T Analysis

Financial Health

Its Prospect for growth

Risk Management.

Subsequent to our findings we will be better able and more confident in our decision as to
whether or not the Company can be granted a loan of $30 Million dollars. To get a more accurate
analysis of the companys performance we decide that the analysis of the company be done over
a three year margin.

Blue Power Group Limited Lending Project

Credit Officers assigned are:

Korie Hyde 1102595
Ms. Tashane Amos 0908041
Ms. Cidnie Dixon - 1202051
Natalie Richards-Miller - 1205568
Christina Shaw 0704202

Blue Power Group Limited Lending Project

Table of Contents
______________________________________________________________________________
Introduction
Company Overview.........................................................................................................................1
Historical Performance

Financial Analysis (2014-2015)

Future Prospect of the Company

How equipped is the company in pursuing future opportunities?

SWOT Analysis

Where is the company headed........................................................................................................

Health of the Company

Prospects for Growth 10

Credit Considerations and Risk Management11
Conclusion and Recommendations
Appendices

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Blue Power Group Limited Lending Project

Overview of Blue Power Group Limited

Established in 1998 by founder and Board Chairman Dhiru Tanna, and leading business
partners Antony Hart C.D., Mark Hart, Jane Fray, Peter Millingen, and Kenneth Benjamin C.D.
Blue Power Group Limited (BPOW) was incorporated and domiciled in Jamaica and is listed on
the Junior Stock Exchange. Blue Power Group Limited (BPOW) operates two divisions: Lumber
Depot, which is a retailer of construction and hardware supplies including cement, steel, lumber,
plumbing and electrical supplies and located at 17c Gordon Town Road, Papine, Kingston 6; and
Blue Power Soap; a manufacturer of laundry and beauty soaps including the popular Blue Power
cake laundry soap and is located at 4 Victoria Avenue, Kingston CSO.
The Group specializes in the sale of soaps, construction and related hardware supplies and has
been in action since 1998. The name was changed to its current name in 2010.
Under the guidance of their Managing Director, Major Noel Dawes, the group organized the
activities into the two divisions formally closing the operations of the Blue Power Company
Limited in 2010.
According to the groups chairmans report, they increased sales by 1.4%, Lumber Depot
division moved from sales of $728 million to $735 million while the Blue Power division
improved from $318 million to $325 million.
After-tax-profits were slightly lower at $70million as the company became liable to tax after
completing five years on the Junior Market in the third week of April. During the year, they
increased the advertising and promotion spent by a substantial amount to attract more business at
the Lumber Depot division and to achieve more visibility for their branded soaps in the retail
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Blue Power Group Limited Lending Project

outlets. The groups expenses were significantly higher than the previous year due to salary
increases and provisions for receivables. The conditions of the market impacted their ability to
increase prices so the extra costs could not be recouped. Therefore, the earnings per share
declined from $1.65 to $1.24.

Blue Power Group Limited Lending Project

Historical Performance

Blue Power Group Limited reported unaudited consolidated earnings results for third quarter and
nine months ended January 31, 2015. For the quarter, the companys revenue was $263,870,869
against $259,082,914 a year ago. Profit before net finance costs and tax was $12,413,371 against
$16,039,556 a year ago. Profit attributable to members was $12,404,091 or $0.22 per stock
against $15,219,773 or $0.27 per stock a year ago. For the nine months, the companys revenue
was $800,352,766 against $779,919,568 a year ago. Profit before net finance costs and tax was
$63,457,752 against $72,740,487 a year ago. Profit attributable to members was $63,924,424 or
$1.13 per stock against $70,399,905 or $1.25 per stock a year ago. Cash provided by operating
activities was $76,590,175 against $9,510,426 a year ago. Purchase of property, plant and
equipment was $26,271,788 against $12,337,303 a year ago.
Since its listing on the Junior Market of the Jamaica Stock Exchange since April 2010 the
company had enjoyed first five years of full tax break, with subsequent years offering a tax rate
equivalent to half the going tax rate. Resulting from its listing on the Junior Market of the
Jamaica Stock Exchange the company tax exemption was lifted. At the ending of its tax
exemption the company has paid roughly $654,000 in taxes on its pre-tax profit for the year
despite its profit dip at both divisions from $42.4 million to $26.1 million at the lumber division
and from $50.6 million to $44.5 million at the soap division. . Blue Power Group Ltd, made $70
million net profit-after-tax for its April 2015 year end or 25 per cent lower year-on-year due to
higher marketing spend and its inability to increase prices. The groups expenses were
significantly higher than the previous year due to salary increases, provisions for receivables and
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Blue Power Group Limited Lending Project

increased advertising and promotions by a substantial amount to attract more business at the
Lumber Depot division and to achieve more visibility for their branded soaps in the retail outlets.
The conditions of the market impacted their ability to increase prices so the extra costs could not
be recouped. Therefore, the earnings per share declined from $1.65 to $1.24.

Blue Power Group Limited Lending Project

Blue Power Group Limited Financial Statement Analysis

(2012-2014)
Financial Statement Analysis
2015

2014

7.42 times
3.67 times

6.38 times
3.06 times

20.87%
6.60%
14.24%
14.02%

20.87%
8.90%
21.65%
21.65%

Liquidity Ratios
Current Ratio
Quick Ratio

Productivity Ratios
Gross Profit Margin
Net Profit Margin
Return on Equity
Return on Asset
Liquidity Ratios
These are ratios that show the relationship of a firms cash and other current assets to its current
liabilities (Brigham & Houston, 2003).For this report, the current ratio and the quick ratio will be
used. The current ratio is calculated by dividing current assets by current liabilities.

The Current Ratio formula is:

It indicates the extent to which current liabilities are covered by those assets expected to be
converted to cash in the near future. Blue Powers current ratio shows that their current liabilities
can be paid 7.42 times for the year 2015, which is an increase from 2014s 6.38 times.
The quick ratio is the current assets minus the inventory all divided by current liabilities. This
ratio is thought of as a better indication of how current assets (minus the current asset with a high

Blue Power Group Limited Lending Project

turnover) can pay current liabilities. The quick ratio in 2014 is 3.06 times but it increases to 3.67
in 2015 showing that without the most liquid asset the business can still cover its obligations.
Profitability Ratios
The profitability ratios highlight how well the business uses their resources and turns into profits.
Four of these ratios are used in the analysis. They are gross profit margin, net profit margin,
return on assets and return on equity. The gross profit margin is measured as revenue minus the
cost of goods sold all divided by revenue.

It shows how much is left from sales after subtracting the cost of production of the goods sold.
The business above has a gross profit margin of 20.87% for both 2014 and 2015. This means for
every dollar earned, the group makes 20.87%.
The net profit margin, similar to the previously mentioned ratio, measures the amount of money
a business keeps from sales. A high net profit margin means that the business is increasing their
profits and that they are good at controlling their expenses and costs. Blue Power has a net profit
margin of 6.6% for 2015 and 8.90% for 2014 which shows a decline of 2.3%. This shows that
their profitability has declined.
The next ratio is the return on equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have invested
(Investopedia, 2014). For 2015, the ROE was 14.24%, while 2015 was 21.65%. This shows that
the profit generated with shareholders investment has lessened.
Lastly is the return on assets, which is calculated by dividing the net income by total assets. It
highlights how well a business can use their assets to produce earnings. In 2015, Blue Power had
a ROA of 14.02% and 2014s ROA was 21.65%. This shows that the efficiency that produces
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Blue Power Group Limited Lending Project

21.65% decreased by 7.63%.

Altmans Z score
Altmans Z score
Z 1 .2 X 1 1 .4 X 2 3 .3 X 3 0 .6 X 4 1 .0 X 5
Previously known as the discriminant analysis which
was used to highlight/discriminate against two groups, for example those of a financially sound
and others being financially distressed. It was then applied in lending by Altman in 1968 where
ratio analysis applied to determine which firms were in distress and which were not. After which
it had further became known as Altmans Z score (Zeta Score) which provided cut off levels. The
ratio stipulates that firms that fall below the set ration Z<1.81, are likely to default, firms that
range 1.81<Z<2.675 may or may not default, and finally if Z firms are very much unlikely
to default.
The Altmans Z score formula is given as:
Where X1 = Working Capital/ Total assets
X2 = Retained Earnings / Total Assets
X3 = EBIT Total Assets
X4 = Market Value Equity / Book Value of Liabilities
X5 = Sales / Total Assets
The following table is an illustration of the Blue Power Group Limited Z-score
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Blue Power Group Limited Lending Project

Altman's Z Score
Z =1.2X+1.4X2+3.3X3+0.6X4+X5
X1=
X2=
X3=
X4=
X5=

Working Capital/Total Assets

Retained Earnings/Total Assets
Ebit/Total Assets
Market Value of Equity/Book Value of Equity
Sales/ Total Assets

Working Capital=
Current Assets
Current Liabilities

Current Assets-Current Liabilities

2015
$493,315,890 $426,832,390
$66,483,500

2014
$450,295,981
$70,543,580

$379,752,401

X1=

$426,832,390
$565,637,561

0.75

$379,752,401
$500,479,890

X2=

$404,518,314
$565,637,561

0.715

$258,408,601
$500,479,890

0.69

X3=

$66,739,132
$565,637,561

0.118

$98,031,114
$500,479,890

0.17

X4=

$499,154,061
$66,483,500

7.508

$345,308,748
$88,470,583

6.09

X5=

$1,060,257,891
$565,637,561

$1,045,837,048
$500,479,890

2.09

Z-Score=

2015
1.2*(0.75)+1.4(0.715)+3.3(0.118)+0.6(7.508)+1.87
8.6652

Total Assets

1.87

$565,637,561

0.76

2014
1.2*(0.76)+1.4(0.69)+3.3(0.17)+0.6(6.09)+2.09
8.18
$500,479,890

Interpretation
In this case Blue Power Group Limited is not likely to default because they have a z-score of
8.6652 which is above 2.675. We can then come to the conclusion that Blue Power is a good
credit choice.

Blue Power Group Limited Lending Project

How Equipped is the Blue Power Group Limited in Pursuing

Opportunities in the Future?

Blue Power Group Limited Lending Project

SWOT Analysis
SWOT Analysis for Blue Power Group Limited
Strengths

Blue Power is involved in the productions of a wide range of products.

The company has a strong brand name.

They have the capability and competence to produce and manufacture on a large scale.

Due to the firms diversification, risk of possible failure is low.

Average line quality and representation in both the domestic and international market.

Emphasis is strongly placed on both the marketing, promotion and research and
development.

The factories are able to use the solar energy as means of reducing power costs

More investment is put into technology and innovations.

Production is increased with the number of highly skilled persons.

Weakness

Heavy competition in both the local and global market.

The group may tend to shift to drift from their main focus because of the diversified
nature which they possess.

Market shares, productivity and profit earnings are decreasing.

Over a period of time Blue Power will more likely face challenges in achieving and
maintaining sustainable alignment.

It in ability to be consistently available in the supermarket/superstores.

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Blue Power Group Limited Lending Project

Despite the attempts at efficiency, there are still underutilized assets at many of its
divisions.

Market lines are extensive, and the extent is not known by many consumers as much of
there produced items are not labelled. As such, the company loses brand association and
potential sales, customer base and retention (returning customers).

Opportunities

Capabilities to increase internationally competition and exports.

With the availability of collaborative technological development it is easier to adapt new

technologies.

Opportunities for both the forward and backward integration exist in the supply chain so
more value is created in the supply network.

The company can still improve its profitability by monitoring its manufacturing process
closer to eliminate the manufacturing wastage and loss

They can continue to expand into new products as they have a range of different
manufacturing capabilities at the difference subsidiaries

Threats

The economy possesses systematic risk and will negatively affect the firms operations.

The operations can be affected by natural disasters such as earthquakes and hurricanes
and it may also negatively affect profitability.

High competition from Hardware supplies, Lumber and imported soaps.

Market inflation is influenced by market commodities.

One of their divisions in Papine, Kingston tends to turnover inventory slow based on its
location. This may post a threat if the trend continues.
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Blue Power Group Limited Lending Project

They are operating in mature industries, hence there is heavy competition cheaper
substitutes.

Where is the Company Headed?

When one speaks of the direction in which a company headed, it speaks to the productivity and
profitability levels in which the company is achieving or can achieve.
There are a number of factors that can help contribute to the direction in which a company is
headed. The state of the economy is one such factor that depicts the direction of the company as
economic indicators such as interest rates and foreign exchange rate helps to depict market
trends, sales and profitability of a company. The Blue Power Group Limited as was mentioned
previously, operates in Jamaica, an island characterized high inflation and unstable prices.
One way to predict the direction in which the company is headed is to analyze the figures on the
financial statements. Based on all the ratios that were done on this company over a period of the
two years it can be said that if Blue Power Group Limited should continue on the same path
then they may be running into deeper trouble their profits are decreasing their returns on the
assets and equity arent substantial enough to improve the companys financial standing. The
only positive for Blue Power Group Limited is that their credit score is extremely great based
on the Altman Z score method and with this financial institution just might offer them loans to
start projects which improve the financial standing of the firm.
Blue Power Group Limited manufacturing division is also conducting an on-going
negotiation to supply more corporate business with construction products and to focus on market

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penetration. The company will be offering products such as Lumbers etc. Conducting business
with major businesses will help to boost Blue Power Group Limited profit in the near future.

Credit Considerations and Risk Management

Risk Management
The 5 Cs
This is basically a measurement of the credit risk of a company. When the 5Cs are analyzed
namely Character, Capacity, Capital, Collateral and Condition the lender of the loan is better able
to determine if the company is credit worthy of receiving the loan. So in essence the 5Cs will
look at the creditworthiness of Blue Power Group Limited.
Character is seen as the general impression that is made on the prospective lender or investor.
The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to
repay the loan or generate a return on funds invested in your company. In order to be more
specific, important intricacies that can be looked into to help in the character judgment process is
how the matters of tax payment, has the business ever filed for bankruptcy and your experience
in business and in your industry will be considered. The quality of your references and the
background and experience levels of your employees will also be reviewed. These assessments
can be critical to the success of credit approval and therefore the growth of the institution.
Capacity is the ability to repay is the most critical of the five factors; it is the primary source of
repayment - cash. The prospective lender will want to know exactly how you intend to repay the
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loan. The lender will consider the cash flow from the business, the timing of the repayment, and
the probability of successful repayment of the loan. Payment history on existing credit
relationships - personal or commercial- is considered an indicator of future payment
performance. Potential lenders also will want to know about other possible sources of repayment.
Capital is the money you have personally invested in the business and is an indication of how
much you have at risk should the business fail. Interested lenders and investors will expect you
to have contributed from your own assets and to have undertaken personal financial risk to
establish the business before asking them to commit any funding.
Collateral, also known as guarantees are additional forms of security you can provide to the
lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to
the lender with the agreement that it will be the repayment source in case you can't repay the
loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document
promising to repay the loan if you cant; in addition some lenders may require such a guarantee
as well as collateral as security for a loan.
Conditions are described as the intended purpose of the loan. Will the money be used for
working capital, additional equipment or inventory? The lender will also consider local economic
conditions and the overall climate, both within your industry and in other industries that could
affect your business.
Conditions refer to overall evaluation on the proposed business or project. Will the money be
used for working capital, additional equipment or inventory? The lender will also consider local
economic conditions and the overall climate, both within your industry and in other industries
that could affect your business.
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Blue Power Group Limited Lending Project

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Blue Power Group Limited Lending Project

can be as the chance that an investment's actual return will be different than expected.
Risk includes the possibility of losing some or all of the original investment (Investopedia.com).
Risks that Blue Power Group Limited face in its normal operations is use by the lender to
determine the riskiest of the advancement of the loan which can be use by the lender to help
determine the level of interest rate and the strictness of the terms and conditions, these risks can
be categories as follows;
Operations Risk
This is the risk that results from a breakdown of internal procedures, people or system.
The downside of the risk is that it can affect the whole internal operation of the companys level
of productivity. Blue Power manages this form of risk through the strong management team that
ensures all the proper procedures are in place for efficient and effective production. The
Managing Director, Major Noel Dawes also stated in his message that they are technologically
driven which enhances their daily operations.
Credit Risk
This is viewed as the ability of Blue Power Group Limited to collect it account
receivables. Based on research the average collection period is showing a major increase from
2014 to 2015 in days of collection. This can pose a threat to the companys operation because
they are taking longer to collect its receivables. The lender may see this as a negative impact on
the companys ability to service its loan.

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Blue Power Group Limited Lending Project

Interest Rate Risk
Blue Power considers interest rate risk to be risk that the value of a financial instrument will
fluctuate because of changes in the interest rate. The company tries to manage its interest rate
risk by maintaining an appropriate mixture of variable and fixed rate instruments. This policy
also tries to manage interest bearing financial assets and interest bearing financial liabilities.
Currency Exchange Rate Risk
The definition , The risk of loss of value caused by changes in the rate at which one nations
currency may be converted to another nations currency.,(Rejda, 2008) is a general statement for
all companies that face currency exchange rate risk. On the other hand, Blue Power considers
exchange rate risk to be according to its audited financial statements to be the fair value of future
cash flows of a financial instrument may fluctuate because of changes in foreign exchange rates.
Seeing that foreign exchange is a major cause of currency exchange rate risk, the current
situation with the exchange rate primarily to the US dollar with which most companies buy and
sell with in Jamaica is at an all time high, this proves to be detrimental to the company in that it
will cost more money to buy raw materials for its productions and for other transactions which
are vital to the company.
Market Risk
This is the risk of day to day potential for investors to experience losses from fluctuation
in securities prices, such risks are; interest rate changes, price (inflation) changes, exchange rate
changes etc. The downside of this risk is that it cannot diversify away. Blue Power Group
Limited manage this form of risk by borrowing less and raise money mainly through the issuance
of equity, this reduce their exposure to interest rate changes. Blue Power Group Limited also
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Blue Power Group Limited Lending Project

tries to produce low cost products as mentioned earlier that will be attractive to consumers when
inflation is high and level of unemployment is also high. The lender can use the assessment of
how Blue Power Group Limited deals with their market risk to help determine if they are able to
meet their requirements of the loan.
Financial risk
This is the risk that the company will not have adequate cash flow to meet its financial
obligation. Based on the liquidity ratios it is obvious that Blue Power Group Limited has
adequate current asset that covers their current liabilities, however it was also stated earlier that
most of their current assets is tied up into their inventory and receivables which may pose a
threat due to the current economic condition and the fact that their average collection period is
increasing. The company however tries to manage its level of financial risk in order to still make
a profit.
Other risks faced by Blue Power Group Limited are; the risk of specific international
factors such as changes in war, oil shortages etc. these changes affects their operations because
our economy today is highly globalize and any changes in another country have a ripple effect on
Jamaica also Blue Power Group Limited have portion of the market share internationally. The
company tries to diversifying their product line and is also exporting to the Diasporas and parts
of the United States of America. Another risk faced is the level of Competition i.e. the threat of
substitute from their competitors; they try to mitigate this form of risk also through
diversification in product line. There is also the current financial situation of the country and
consumers holding on to their little disposal income in order to derive more from it to meet their
needs. Hence consumer spending has declined.
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Blue Power Group Limited Lending Project

Blue Power manages its level of risk fairly well which can be seen in it overall
performance. Based on the condition of the company it can be said that Blue Power Group
Limited would be able to comply with the lender requirements.

Conclusion

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Blue Power Group Limited Lending Project

Based on the assessment of the company, we can concluded that Blue Power Group
Limited has the qualities needed in a borrower, which includes the requirements of being
qualified for the loan and also the capacity of repaying the loan amount and interest charges. The
loan is unlikely to default based on the result of the calculated Altman Z score technique. The
company has sufficient equity to contribute to the capital amount to go along with the proposed
debt amount, i.e. the lender will not be exposed to all the risks that surround the loan. The
company plans to expand the growth of the business with this 30 million dollar opportunity and
based on the financials of the audit report; the company has sufficient cash flows and is in good
health to take on this major opportunity.

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Blue Power Group Limited Lending Project

References
Altman

Z-Score.

(n.d.).

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14,

2015,

from

investopedia:

http://www.investopedia.com/terms/a/altman.asp
Bloomberg Business. (2015).Blue Power Group Limited Company Overview. Blue Power
Group Limited. Retrieved on July 8, 2015 from http://www.bloomberg.com
Bloomberg Business. (2015). Reports Unaudited Consolidated Earnings Results for Third
Quarter and Nine Months Ended January 31, 2015. Blue Power Group Limited. Retrieved
on July 8, 2015 from http://www.bloomberg.com
Blue Power Group Lmited. (2015). Blue power group audited financial statements . Retrieved
on June 9, 2015 from http://www.jamstockex.com/wp-content/uploads/2015/06/BPOWAudited-Results-2015.pdf
Brigham & Houston, (2003). Fundamentals of financial management. (10 ed., p. 89).
Jamaica Stock Exchange. (2015). Blue Power Group Limited. Retrieved from
www.jamstockex.com on July 1, 2015.
Investopedia. 2014. Retrieved from: http://www.investopedia.com/terms/l/liquidity.asp
July 9, 2014
What is 5C Credit Analysis? (n.d.). Retrieved July 14, 2015, from mansid.wordpress:
https://mansid.wordpress.com/2009/06/25/what-is-5c-credit-analysis/
5

Cs

of

Credit

Analysis.

(n.d.).

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July

14,

2015,

http://www.mbda.gov/blogger/financial-education/5-c-s-credit-analysis

from

mbda.gov:

Blue Power Group Limited Lending Project

5Cs

of

Credit

Analysis.

(n.d.).

Retrieved

July

http://sbdc.kennesaw.edu/5CsofCreditAnalysis.htm

14,

2015,

from

kennesaw: