Investment Case Study Introduction

INVESTMENT CASE STUDY INTRODUCTION 4

InvestmentCase Study Introduction

InvestmentCase Study Introduction

Theimportance of financial statements cannot be gainsaid as far asinforming individuals about the financial soundness of any businessentity is concerned. Indeed, financial statements are supposed toproduce an accurate picture about the financial position of thecompany, so as to allow potential investors to make proper decisionsregarding investing in them. It is, therefore, not surprising thatDavid’s friend would refer him to the financial statements ofNathans Finance NZ limited in determining the efficacy of investingin secured debentures. However, given that David was deficient ofaccounting knowledge, he needed a proper analysis of the company’sattractiveness especially with regard to the secured debentures.

Nathans,a limited liability company was established on 23rdJuly 2001 and has been under the sole ownership of VTL Group Limited.It has 10,000,100 shares all owned by the group and has fourdirectors, three of whom double up as directors in the group. Thecompany issued a prospectus so as to raise NZ$100 million throughissuing secured debentures. The funds were aimed at developing itsbusiness of offering financial services and financial accommodation.The debentures would have an interest rate of between 8.8% and 9.5%subject to its maturity period as selected by the investor. Theinvestor would also choose the maturity period of the same, and wouldbe notified about the same by the company within a month. The minimuminvestment for the debentures is NZ$1000 for a term investment withan interest that will be paid every three months and a NZ$15000 for aterm investment that is to have its interest paid on a monthly basis.However, the investor will have an opportunity to change thereinvestment instruction upon being notified about the details of thedebentures a month after applying for the same. Further, the investoris at liberty to apply for early investment repayment, although thecompany will be the sole determinant of whether the repayment wouldbe paid in part or in full prior to the maturity date if the investorso wishes.

Decision

Thisgroup was supposed to advice David on whether to invest his NZ$70000in the company’s debentures. However, it would be advisable that hedoes not invest in the company. Indeed, both Nathans and its parentcompany VTL Group Limited have poor liquidity. This is complementedby the fact that the two companies also have a high level of risk ascalculated on their total debt against total assets. Further, thecompany has been experiencing problems in its loans collection since2005, while its doubtful debt provision tripled in 2006 from theprevious year.

References

Analysingthe Financial Statements of a Finance Company for Making anInvestment Decision: The Case of Nathans Finance NZ Ltd