Credit Analysis: ZEPBROOK LIMITED

1. Credit Opinion: CONDITIONAL

Rationale: Zepbrook presents a fundamentally strong balance sheet with substantial net assets (£3.53M) and significant cash reserves (£2.81M). However, the recent subsidiary acquisition (£2.82M in August 2024) introduces integration risk and has materially altered the liability profile. Current liabilities nearly doubled year-on-year (£1.55M to £2.40M), and non-current creditors increased fivefold (£71.8K to £359.5K). The retained profit for the year appears modest at approximately £37K, which raises questions about cash generation capacity relative to the balance sheet size. Approval is recommended subject to conditions around acquisition integration and debt service coverage.

2. Financial Strength

Balance Sheet Overview: | Metric | 2024 | 2023 | Movement | |--------|------|------|----------| | Total Assets | £6.32M | £5.10M | +£1.22M | | Total Liabilities | £2.40M | £1.55M | +£847.7K | | Net Assets | £3.53M | £3.45M | +£81K | | Shareholders' Funds | £3.53M | £3.45M | +£81K |

Key Observations:

• Asset Quality: The 2024 acquisition introduced £1.67M in subsidiary investments and £103.7K in intangible website assets. Tangible assets grew modestly to £447K. The composition has shifted meaningfully from a cash-heavy balance sheet to one with significant investment exposure.

• Liability Profile Deterioration: Current liabilities surged 54.5% to £2.40M. This requires investigation—if acquisition-related trade creditors or short-term acquisition finance, the risk profile differs from operational liability growth. Non-current creditors of £359.5K (up from £71.8K) suggest new term debt, likely acquisition-funded.

• Gearing: Total liabilities represent 38.1% of total assets (2023: 30.5%). While still conservative, the trajectory warrants monitoring. Net assets have grown consistently from £1.35M (2013) to £3.53M (2024), demonstrating long-term value creation.

• Goodwill Concern: The company carries £1.0M in fully-amortised goodwill on its books, suggesting a prior acquisition that has been written down entirely. This may indicate historical overpayment or impairment, though the current net asset position suggests recovery.

3. Cash Flow Assessment

Liquidity Position: | Metric | 2024 | 2023 | |--------|------|------| | Cash | £2.81M | £3.44M | | Current Ratio | 1.71x | 3.05x | | Net Current Assets | £1.70M | £3.18M | | Quick Assets (Cash + Debtors) | £3.65M | £4.40M |

Assessment:

• Cash Remains Substantial: Despite a £625K decline, £2.81M in cash provides significant liquidity headroom. The reduction is directly attributable to the acquisition outflow.

• Current Ratio Under Pressure: The decline from 3.05x to 1.71x is material but remains above the typical 1.5x threshold for acceptable working capital coverage. However, the pace of deterioration needs to stabilise.

• Working Capital Composition: Stocks increased 35% to £452.5K (potentially acquisition-related), while debtors decreased 13.3% to £838.7K. The stock increase warrants monitoring for obsolescence risk, particularly in the office refreshments sector.

• Cash Generation Concern: Retained earnings increased by only £37K despite a business with £6.3M in total assets. This suggests either: (a) significant dividend extraction, (b) acquisition-related costs suppressing profits, or (c) thin operating margins. Without the P&L (filed under small company exemptions), this is a key information gap.

• Deferred Tax: £26.1K provision (up from £23.3K) is modest and manageable.

4. Monitoring Points

Immediate Priorities:

1. Acquisition Integration: The subsidiary acquired in August 2024 requires close monitoring. Request management commentary on: synergies realised, trading performance since acquisition, and any additional capital requirements. The £1.15M surplus cash distribution to vendors should be verified as complete.

2. Liability Composition: Obtain breakdown of the £2.40M current liabilities—distinguish between trade creditors, acquisition finance, and operational obligations. The fivefold increase in non-current creditors (£359.5K) suggests term debt; confirm repayment terms and covenant conditions.

3. Profitability Verification: The company has elected not to file its profit and loss account. Request management accounts or audited group accounts to assess true trading profitability and cash generation capacity. The £37K retained profit appears inconsistent with the balance sheet scale.

4. Group Structure: The PSC register shows dual control by Greenworks Solutions entities. Request group consolidated accounts to understand intercompany exposures, guarantees, and cash flow dependencies. The parent company exemption from consolidation should not mask group-level risks.

5. Cash Trajectory: Monitor quarterly cash positions. The £625K decline must stabilise. If the acquisition requires further working capital investment, liquidity could erode further.

6. Dividend Policy: Clarify whether dividends are being extracted. Significant dividend payments would explain the modest retained profit increase and affect debt service capacity.

7. Sector Risk: Office refreshments (SIC 56290) faces structural headwinds from hybrid working patterns reducing office occupancy. Assess revenue resilience and client concentration.