Credit Analysis Report: HG WELLS LTD

1. Credit Opinion: CONDITIONAL APPROVE

Reasoning: HG Wells Ltd demonstrates a strongly improving financial trajectory with significant growth in net assets (£190,224 to £326,332 in the latest year) and a substantially strengthened cash position (£37,502 in 2023 to £276,614 in 2025). However, the approval is conditional due to: (i) sector concentration in oil & gas support services, which carries cyclical risk; (ii) thin working capital with net current assets of only £5,039; and (iii) heavy reliance on director loans which comprise 61% of current liabilities. Any credit facility should include a requirement for director loan subordination.

2. Financial Strength

Balance Sheet Summary (Aug 2025):

Positive Indicators: - Net assets have grown from £24,939 (2015) to £326,332 (2025) – a 13-fold increase demonstrating sustained value creation - Tangible fixed assets of £451,715 provide meaningful collateral coverage, including land & buildings (£123,599) and plant & machinery (£243,201) - Significant capital investment of £89,880 in the latest year (primarily plant & machinery) indicates ongoing business investment - No indication of intangible asset inflation – value is in tangible, realisable assets

Concerning Factors: - Share capital of only £2 suggests minimal equity cushion from shareholders beyond retained profits - Deferred tax liability of £77,277 (up from £67,111) is material and growing – likely reflecting revaluation gains or accelerated capital allowances - The business operates in SIC 9100 (petroleum & natural gas support), exposing it to commodity cycle volatility

Asset Quality: Fixed assets are predominantly operational plant & machinery with an NBV of £243,201. The land & buildings at £123,599 (cost £133,103) suggests limited revaluation, providing potential upside. Motor vehicles at £38,481 are depreciating assets with limited realisable value.

3. Cash Flow Assessment

Liquidity Position:

Significant Improvement: The working capital position has transformed from a deficit of £149,202 to a surplus of £5,039. However, this remains razor-thin and provides minimal buffer.

Director Loans – Critical Factor: Director loans of £228,190 represent the single largest current liability (61% of current liabilities). This increased from £188,617 in the prior year. While this demonstrates shareholder commitment, it also means: - The apparent working capital improvement is largely driven by intercompany debt - Directors could theoretically demand repayment, creating immediate liquidity stress - The true third-party current ratio (excluding director loans) would be approximately 3.7x

Debt Service Obligations:

Total external debt (excluding director loans) of £78,415 is modest relative to the asset base. Finance leases likely relate to the vehicle and equipment fleet.

Cash Generation: Cash has increased by £70,451 despite significant capital expenditure of £89,880, suggesting strong operating cash generation. Trade debtors of £61,243 (up from £43,376) may indicate slower collections or revenue growth.

4. Monitoring Points

Key Metrics to Watch:

1. Director Loan Balance: Track whether this continues to increase. A formal subordination agreement should be obtained for any new credit facility. Consider requesting conversion to equity to strengthen the balance sheet.

2. Working Capital Ratio: Current ratio of 1.01x is marginal. Any deterioration could trigger liquidity concerns. Target minimum of 1.25x.

3. Sector Revenue Dependency: Monitor oil & gas commodity prices and UK North Sea activity levels. Revenue concentration in this sector creates earnings volatility.

4. Trade Creditor Days: Trade creditors reduced from £110,057 to £43,013 – investigate whether this reflects improved terms or cash funding of supplier payments (which would reduce working capital flexibility).

5. VAT Creditor: The VAT liability of £22,399 (down from £54,633) should be monitored for timely payment to avoid HMRC enforcement action.

6. Deferred Tax: Growing from £67,111 to £77,277 – ensure this liability is properly provided for and understand the underlying timing differences.

7. Employee Numbers: Reduced from 8 to 6 – clarify whether this reflects efficiency gains or contraction that might impact service capacity.

8. Related Party Transactions: Note reference to Reconvey Limited as a related party – understand the nature of this relationship and any intercompany exposures.

Recommended Facility Structure: - Any lending should include director loan subordination - Consider fixed charge over land & buildings (£123,599) as security - Monitor financial covenants quarterly: minimum net current assets of £50,000; maximum leverage ratio - Sector-specific covenants linked to oil price thresholds may be appropriate