- 20 Marks
Question
Aduane Restaurants and Mobile Food Ltd. has operated an account with us for the past ten years since the inception of the company. The company has ten restaurants located at strategic parts of Accra, two at Takoradi and two in Kumasi.
The CEO of the company Mr. Sampson Arthur has come to see you for a discussion about the future of the company. Due to road construction, his key head office restaurant branch located at East Legon is no longer viable. He has identified another premises located close to the center of Accra which he wishes to acquire. According to him the vendors, who are siblings who inherited the property from their deceased parents, wish to dispose of the property in order to avoid unnecessary disputes among themselves. The property is also a bit dilapidated and would need to be overhauled. The company has been given a favourable price of GHC 800,000.00 to facilitate a quick sale. The company is able to provide 20% of the purchase and is asking the bank to finance the difference.
The company provides services primarily to workers within their vicinity. The company has become a household name due to the quality of their food and services. The company has a fleet of vans which assist in the delivery, one van for each branch. The ambience of their premises is also attractive and their restaurants are always milling with clientele mostly bank staff, civil servants and staff of private companies, at lunch time. They are also a favorite choice for wedding and other social occasions.
Their bank account operations however declined due to the onset of Covid and its impact on workers having to work from home. You have nonetheless discerned a slight improvement in their operations from the current bank account operations.
Management team comprises, Mr. Samson Arthur, aged 46, Chairman and CEO of the Company, Mrs. Mary Arthur, aged 45, COO and Chief Matron of the company and Mr. Kweku Johnson, aged 32 CFO of the company. Mr., Samson Arthur is a graduate in Economics from University of Ghana Legon and an MBA in Marketing. He worked in one of the top banks in the country for ten years prior to his resigning to take over his aged mother’s restaurant. Mrs. Mary Arthur, his wife has a degree in Food Science and Nutrition from the Ho University. She served as a matron at Wesley Grammar High School prior to joining the company at its inception. Kweku Johnson is a close family friend of the CEO and holds a Diploma in Accounting from the University of Professional Studies, Accra. Prior to joining the company Kweku worked at the Labone Polyclinic as an accounts staff.
Each branch has a manager and a chief cook, supported by two matrons. In addition, they hire waiters and waitresses on temporary basis and put them through some rigorous training before deploying them.
Critically examine this proposition as per information above and the related financial statements below.
Aduane Restaurant and Mobile Food Ltd Profit and Loss Extracts for the year ending 31st Dec
| 2020 GHC | 2021 GHC | 2022 GHC | |
|---|---|---|---|
| Sales | 1,899,500 | 2,796,460 | 3,215,929 |
| Opening Inventory | 204,570 | 321,215 | 503,363 |
| Production cost | 968,945 | 1,482,124 | 1,768,761 |
| 1,173,515 | 1,803,339 | 2,272,124 | |
| Closing Inventory | 321,215 | 503,363 | 643,186 |
| Cost of Sales | 852,300 | 1,299,976 | 1,628,938 |
| Gross Profit | 1,047,200 | 1,496,484 | 1,586,991 |
| Overheads | 44,880 | 235,386 | 268,292 |
| Depreciation | 131,000 | 162,500 | 256,500 |
| Operating Profit | 871,320 | 1,098,598 | 1,062,199 |
| Interest Paid | 38,000 | 54,000 | 102,000 |
| Profit Before Tax | 833,320 | 1,044,598 | 960,199 |
| Tax | 208,330 | 261,150 | 240,050 |
| Profit After Tax | 624,990 | 783,449 | 720,149 |
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 615,000 | 600,000 | 585,000 |
| Equipment | 75,000 | 118,500 | 232,000 |
| Motor Vehicles | 210,000 | 200,000 | 395,000 |
| Furniture and Fixtures | 114,000 | 123,000 | 118,000 |
| Total | 1,014,000 | 1,041,500 | 1,330,000 |
| Current Assets | |||
| Inventory | 321,215 | 503,363 | 643,186 |
| Receivables | 445,880 | 701,150 | 1,010,560 |
| Prepayment | 19,250 | 45,210 | 55,610 |
| Bank | 15,000 | 14,800 | 25,600 |
| 801,345 | 1,264,523 | 1,734,956 | |
| Current Liabilities | |||
| Trade Payables | 322,915 | 531,327 | 675,345 |
| Overdraft | 125,000 | 15,542 | 270,382 |
| Total Current Liabilities | 447,915 | 546,869 | 945,727 |
| Net Current Assets | 353,430 | 717,654 | 789,229 |
| Net Assets | 1,367,430 | 1,759,154 | 2,119,229 |
| Financed by | |||
| Capital | |||
| Share Capital | 800,000 | 800,000 | 800,000 |
| Income Surplus | 567,430 | 959,154 | 1,319,229 |
| 1,367,430 | 1,759,154 | 2,119,229 |
Ratios
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Sales Growth | 47.22% | 15.00% | |
| Receivable Days | 86 | 92 | 115 |
| Payable Days | 122 | 131 | 139 |
| Inventory Turnover Days | 138 | 141 | 144 |
| Gross Margin | 55% | 54% | 49% |
| Overhead % | 2% | 8% | 8% |
| Net Margin | 43.87% | 37.35% | 29.86% |
| Interest Cover | 22.93 | 20.34 | 10.41 |
| Current Ratio | 1.79 | 2.31 | 1.83 |
| Quick Ratio | 1.07 | 1.39 | 1.15 |
| Tax Rate | 25% | 25% | 25% |
| Inventory to Sales | 17% | 18% | 20% |
| Receivables to Sales | 23% | 25% | 31% |
| Payables to Sales | 17% | 19% | 21% |
| Gearing | 9.14% | 0.88% | 12.76% |
| Dividend Payout Ratio | 50% | 50% | 50% |
Answer
Using CAMPARI for this GHC 640,000 loan (80% of GHC 800,000 property), I’ll assess based on my experience in SME lending at Stanbic Bank Ghana, where restaurant financing post-COVID required stress-testing for recovery. Regulatory context: BoG’s Property Lending Guidelines under Act 930 emphasize valuation and LTV <80%, but here it’s exactly 80%—borderline.
Character and Management:
- Family-run with strong credentials: CEO’s banking background, COO’s food expertise. CFO’s diploma is basic, but family tie raises governance concerns (e.g., no independent oversight, per BoG Corporate Governance Directive 2018).
- 10-year account history positive, COVID dip but recovering—aligns with Ghana’s hospitality rebound post-2021 lockdowns.
Ability:
- Financial Trends:
- Sales growth strong: 47.22% (2021), 15% (2022), recovering from COVID.
- Gross margin dipped to 49%, net margin to 29.86%, due to higher costs/inventory.
- Operating profit stable ~GHC 1M, interest cover 10.41 (still good, but declining).
- Balance sheet: Net assets GHC 2.1M, low gearing 12.76%, current ratio 1.83 (adequate for service industry).
- Receivables days up to 115, inventory 144—working capital tied up, risk in perishable goods.
- Cash flow: Profit GHC 0.72M (2022), but overdraft increased—new property could boost revenue 20% if location central.
Purpose and Amount:
- Relocation from unviable site to central Accra: Valid, with overhaul needed. Amount GHC 640,000 reasonable, company contributes 20% equity—good skin in game.
Margin:
- 22% base + 3-5% (lower risk than shipping), total ~26%. Term 5-7 years for property.
Repayment:
- From operations/weddings. Estimated annual service ~GHC 150,000 (amortized at 26%). DSCR ~7 (op profit/debt service)—strong. But monitor COVID-like risks.
Security:
- Legal mortgage over new property (valued independently per BoG), personal guarantees. Type: Charge over building, assignment of revenues.
Recommendation: Approve with conditions: Property valuation >GHC 1M, covenants on ratios (e.g., interest cover >5). Risks: Hospitality volatility (e.g., inflation on food costs in Ghana 2023-2025), but strong brand mitigates.
- Uploader: Samuel Duah
