Financial Health Assessment for SELECT AUTO SALES LIMITED

1. Financial Health Score: D

Explanation:
The company shows clear signs of financial distress with persistent net liabilities and negative working capital over the last three years. The equity position has deteriorated substantially from a small positive net asset base in 2020 to deep net liabilities by 2023. This ongoing erosion signals significant financial strain and challenges in meeting short-term obligations, warranting a below-average grade.

2. Key Vital Signs

3. Diagnosis

The company's financial "vital signs" suggest persistent symptoms of distress:

• Liquidity Strain: Negative working capital in successive years indicates the company struggles to convert assets into cash quickly enough to cover short-term debts. This is akin to a patient lacking sufficient blood flow to vital organs, risking operational disruption.

• Insolvency Risk: The deepening negative net assets (from +£147 in 2020 to -£14,297 in 2023) is a sign of worsening financial health, comparable to a patient losing vital organ function. The company is technically insolvent, meaning if it were to liquidate, liabilities exceed assets.

• Asset Base Weakness: The tangible fixed assets are minimal and have decreased, suggesting either disposal or write-down of assets. This reduces collateral value and resilience against financial shocks.

• Shareholder Support Erosion: Negative shareholders’ funds imply accumulated losses are eroding owner equity. Without fresh capital injection or profitability improvement, the company risks creditor action or insolvency procedures.

• Operational Context: As a used car sales business (SIC 45112), cash flow management is critical given inventory costs and credit terms. The negative working capital suggests possible over-reliance on creditor funding or slow stock turnover.

4. Recommendations

To restore financial health, the company should consider:

1. Cash Flow Management: Implement strict cash flow monitoring and forecasting to avoid liquidity shortfalls. Negotiate extended payment terms with suppliers and seek to reduce stock holding times to free up cash.

2. Capital Injection: Explore options for additional equity investment or shareholder loans to improve the balance sheet and reduce net liabilities.

3. Cost Control: Review operational expenses and overheads to improve profitability and preserve cash.

4. Asset Utilization: Evaluate fixed assets for potential sale or better utilization to generate liquidity.

5. Financial Restructuring: Engage with creditors early to restructure short-term liabilities where possible, reducing immediate financial pressure.

6. Revenue Growth Strategy: Enhance sales efforts and pricing strategies to increase turnover and margins, improving both liquidity and profitability.

7. Professional Advice: Consult financial and legal advisors to develop a turnaround plan and avoid insolvency risks.

Executive Summary