Risk Assessment: COUNTERPLAS LIMITED

1. Risk Rating: MEDIUM

Justification: While Counterplas demonstrates long operational history (34 years), consistent profitability, and clean audit opinions, the dramatic deterioration in working capital position—net current assets declined 83% from £713,875 to £120,885—coupled with a debtors surge that significantly outpaces revenue growth, presents material liquidity concerns that warrant close scrutiny. The current ratio of approximately 1.03 leaves virtually no buffer for operational variability.

2. Key Concerns

i. Severe Working Capital Deterioration

The most pressing concern is the collapse in net current assets from £713,875 (2024) to £120,885 (2025), representing an 83% decline. Current liabilities nearly doubled from £2,346,994 to £4,680,733 while current assets increased by only 57%. The resulting current ratio of approximately 1.03 provides no meaningful margin of safety. Any disruption to cash conversion cycles or unexpected expenditure could trigger a liquidity crisis.

ii. Debtors Growth Significantly Outpaces Revenue

Trade debtors increased by 63% (from £2,384,262 to £3,896,056) while turnover grew only 11.5% (from £11.47m to £12.79m). Debtors now represent approximately 30% of annual turnover, which is high for a manufacturing business. This disparity suggests either: extended payment terms being offered to customers, deterioration in collection efficiency, or potential revenue recognition timing issues. The quality and collectability of this debtor book requires immediate investigation.

iii. Dividend Distribution Exceeds Profitability

The company paid £800,000 in ordinary dividends during 2025, which exceeds the profit for the year (£700,035) and has directly contributed to the erosion of net assets (declining from £1,894,056 to £1,794,091). Extracting cash at this level when liquidity is already under significant pressure raises questions about capital allocation priorities and whether distributions are sustainable or prudent given the balance sheet strain.

3. Positive Indicators

• Established and Resilient Business: Incorporated in 1990, the company has operated through multiple economic cycles. The strategic report references over 30 years of experience, suggesting established market position and customer relationships in the UK plastic moulding sector.

• Revenue Growth and Profitability: Turnover increased 11.5% to £12.79m, with operating profit rising to £997,326 (from £909,674). The company has maintained consistent profitability across the available financial history, indicating a viable underlying business model.

• Strong Operating Cash Generation: Cash generated from operations was £2,279,920 in 2025, a substantial increase from £863,651 in 2024. This demonstrates the business's ability to generate cash from trading activities, even if working capital management requires attention.

• Clean Audit Opinion: TC Group issued an unqualified audit opinion with no material uncertainties regarding going concern noted. The auditor confirmed appropriate use of the going concern basis.

• Regulatory Compliance: All filings are current—accounts and confirmation statements are not overdue. No director disqualification records are noted.

• Continued Capital Investment: £700,567 invested in tangible fixed assets during the year, suggesting ongoing commitment to operational capability and productivity improvement, as referenced in the strategic report.

4. Due Diligence Notes

Priority Investigations:

a) Debtor Book Composition and Ageing: Request detailed aged debtor analysis. Determine the proportion of debtors exceeding 60 and 90 days. Assess whether the debtor growth relates to specific large customers or is widespread. Verify whether any related-party balances exist within debtors.

b) Current Liabilities Breakdown: The near-doubling of current liabilities requires full disaggregation. Specifically identify: trade creditors, short-term loan facilities, accruals, and any provisions due within one year. Understand whether this increase reflects voluntary supplier terms or indicates the company is stretching payments to manage cash flow.

c) Banking and Facility Arrangements: Request details of all banking facilities, including overdraft facilities, revolving credit facilities, and their terms. The company has finance lease obligations (£313,795 paid in-year) and bank loan repayments (£70,510), suggesting significant committed expenditure. Understand whether debtors may be factored or invoice-discounted, which could explain the high debtor figure if facilities are non-recourse.

d) Dividend Policy and Shareholder Structure: Clarify the rationale for the £800,000 dividend distribution. Given that PSC disclosure shows Mr Isherwood owns 25-50% of shares, understand who controls the remaining 50-75% and whether dividend expectations from other shareholders are influencing distribution decisions that may not align with balance sheet health.

e) Customer Concentration: Assess reliance on key customers. With debtors at £3.9m against £12.8m turnover, a small number of large customers could create significant collection risk if any face financial difficulties.

f) Utility and Energy Cost Exposure: The strategic report explicitly identifies energy increases and rising utility costs as margin pressures. For a plastic injection moulding business, energy is a material cost. Investigate whether energy contracts are fixed or variable and what hedging arrangements exist.

g) Forward Order Book and 2026 Outlook: The strategic report mentions new business secured for 2026. Request quantification of committed orders and whether these are on terms consistent with historical patterns or whether extended payment terms are being offered to win business.

h) Related Party Transactions: Given the family structure (Isherwood as director and secretary), review all related-party transactions for appropriateness, including any loans, management charges, or property arrangements between the company and its officers.