50 CHAPTER 4 BUSINESS SOLUTION 4.1 Financial Performance Analysis The financial performance of PT Prakarsa Enviro Indonesia is a vital component of understanding the company's current position and future potential. The basis for this examination will be the company's historical consolidated financial statements, spanning five years from 2016 to 2020. The financial ratios we will be deploying in our evaluation include liquidity ratios, debt ratios, and profitability ratios. These financial ratios, detailed in Chapter 2, will enable us to gain a comprehensive view of PT Prakarsa Enviro Indonesia's financial health and operational efficiency over the past half-decade. This robust financial performance analysis will serve as a solid foundation for the whole valuation process. 4.1.1 Liquidity Ratio Liquidity ratios are important in assessing a company's ability to meet its short- term obligations, especially in this period when the world face multiple crisis from Covid- 19, until geopolitic issues. Liquidity ratios provide insight into whether the company can quickly convert its assets into cash without losing value, which is crucial for ensuring business continuity and growth. For PT Prakarsa Enviro Indonesia, understanding liquidity ratios is especially important in managing its operational requirements in a highly competitive, capital-intensive industry, and their agility in this turbulence period. In this analysis, the liquidity of PT Prakarsa Enviro Indonesia is measured with the current ratio, the quick ratio, and the cash ratio. Each of these ratios offers a slightly different perspective on the company's short-term financial stability, and together, they present a comprehensive picture of PT Prakarsa Enviro Indonesia's liquidity position. 51 Table 3. Historical Liquidity Ratio 2017 – 2021 (Source: Author Analysis) The current ratio has shown fluctuations over the years, as indicated by historical liquidity ratio from 2017-2021 on table above. In the years 2017 and 2019, the current ratios were below 1, at 0.85 and 0.62 respectively, which might have made it challenging to meet short-term obligations. On the other hand, in the years 2018, 2020, and 2021, the current ratios were above 1, specifically 1.33, 1.57, and 1.95 respectively. This indicates that the company had a sufficient level of current assets relative to its current liabilities, demonstrating an improved ability to cover its short-term obligations and reflecting a more favorable liquidity position. The quick ratio remained consistently below 1, except for 2018. A quick ratio below 1 implies that the company might have faced challenges in meeting its immediate liabilities using its most liquid assets, excluding inventory. This could be indicative of potential liquidity risk, where the company might have had to rely on the sale of inventory or other financing sources to settle its short-term obligations. In such a scenario, the company’s financial health could be vulnerable, especially in times of cash flow constraints or if the inventory takes longer to liquidate. The cash ratio consistently below 0.1 from 2017 to 2021 indicates a very limited ability to pay off short-term liabilities with cash and cash equivalents alone. A cash ratio this low suggests that the company has a minimal buffer of the most liquid assets, which can be a concerning signal to creditors and investors. It implies a reliance on the conversion of other current assets into cash or on external financing to meet immediate 52 financial obligations. This narrow margin of safety in terms of liquidity might expose the company to higher risks, especially in volatile or uncertain market conditions. The liquidity ratio analysis showing several key insight on PT Prakarsa Enviro Indonesia financial health. The improving current ratio indicates an enhancement in the company's ability to meet short-term liabilities with its short-term assets, which is a positive sign. However, the persistently low quick and cash ratios are areas of concern. The quick ratio, being consistently below one (except in 2018), suggests that the company might face challenges in paying off its current liabilities without selling inventory, which is not ideal. The cash ratio being stably below 0.1 indicates that the company has very little cash and cash equivalents relative to its current liabilities, which could be problematic in the event of unexpected expenses or opportunities. In a nutshell, while there are positive signs in PT Prakarsa Enviro Indonesia's liquidity position, there are also red flags that management needs to address. The company's low quick and cash ratios suggest a need for additional capital to bolster its liquidity position. By raising capital through a private placement, PT Prakarsa Enviro Indonesia could enhance its financial stability and build a buffer of liquid assets, which would be instrumental in meeting short-term obligations and capitalizing on growth opportunities. 4.1.2 Debt Ratio The debt ratios provide insights into the company's financial health and its ability to meet long-term obligations. In this analysis the debt ratio on PT Prakarsa Enviro will measured with three critical debt ratios, the Debt Ratio, which assesses the proportion of the company's total assets financed through debt, the Debt-to-Equity Ratio, which compares the company’s total liabilities to its shareholders’ equity, and offers a measure of the company's financial leverage, and the Long-Term Debt Ratio, which focuses on the proportion of long-term debt relative to the company’s total capitalization. Those ratios will show a comprehensive picture of PT Prakarsa Enviro Indonesia's debt management and its implications on the company's financial health and the private placement initiative. 53 Table 4. Historical Debt Ratio 2017 – 2021 (Source: Author Analysis) The Debt Ratio of PT Prakarsa Enviro Indonesia exhibits a trend of gradual increment from 2017 through 2021. Specifically, the ratios in 2017 to 2021 were 0.47, 0.56, 0.59, 0.74, and 0.73 respectively. This increasing pattern in the debt ratio shows that the company has been increasingly utilizing debt to finance its assets. However, even though there is a consistent rise, the debt ratio remained under 1 throughout this period. A debt ratio below 1 is indicative of the fact that a majority of the company's assets are financed through equity, which can be viewed as a positive sign. However, the persistent climb in the debt ratio over these years may also hint at a growing reliance on debt, which, if not managed properly, could impact the company’s risk profile and its ability to attract investors or obtain favorable credit terms. The Debt-to-Equity ratio has gone up quite a bit from 2017 to 2021, with the numbers being 0.88, 1.28, 1.45, 2.86, and 2.75 in that order. While taking on debt can help a company grow, too much debt can be risky. It can make it hard for the company to pay back what it owes, especially if the economy takes a downturn or if interest rates go up. For a private placement, where the company sells shares or bonds to a select group of investors, this high debt to equity ratio could be a red flag, signaling potential over- leverage and repayment risks. However, PT Prakarsa Enviro Indonesia can use the private placement to raise equity capital, which could help lower the debt-to-equity ratio and bolster the company's financial standing. Transparent communication about how the funds will be used for growth and stability could be crucial in instilling confidence among investors. The Long-Term Debt Ratio has remained consistently below 0.5, indicating that the company has been cautious in taking on long-term debt relative to its total assets. A 54 low long-term debt ratio suggests that the company is not heavily reliant on debt to finance its operations and investments, which can be seen as a positive sign by investors and creditors. In the context of a private placement, this could be advantageous, as potential investors might be more inclined to invest in a company that isn’t heavily burdened with long-term debt. This conservative approach to long-term financing can provide the company with greater flexibility and resilience in navigating market fluctuations and economic uncertainties, which contributes positively to the company's financial health. Moreover, it signifies a lower risk profile which can be attractive for investors, especially when the company is seeking to raise funds through private placement. In summary, PT Prakarsa Enviro Indonesia's financial health, as evidenced by the three debt ratio metrics, presents a mixed picture in the context of its private placement initiative. The low long-term debt ratio is a favorable indicator, suggesting prudent management of long-term liabilities and reflecting a conservative approach to financing, which may appeal to investors seeking a lower risk profile. However, the substantial increase in the debt-to-equity ratio from 2017 to 2021 signals a growing dependence on debt to finance the company's activities. While some leverage can be advantageous, a too aggressive increase might raise concerns among potential investors about the sustainability of the company's capital structure. The fact that the overall debt ratio has also been increasing, although not as dramatically as the debt-to-equity ratio, might indicate a growing reliance on debt financing. In preparation for the private placement, PT Prakarsa Enviro Indonesia should consider communicating a clear strategy on how the funds raised will be used to improve operational efficiencies, generate revenues, and manage its capital structure more effectively to alleviate any concerns potential investors may have regarding the company’s increasing leverage. 4.1.2.1 Sensitivity Analysis Knowing that current debt to equity ratio is more than 1, this indicates the bad signal for financial health of the company, it is signaling potential over-leverage and repayment risks. The company must improve their ratio, by lowering it to below 1. 55 Using the sensitivity analysis shows in above diagram, the debt-to-equity ratio below 1 can be achieved by reduce the liabilities growth by 50% and improving total equity growth by more than 40%. 4.1.3 Profitability Ratio The profitability ratios are essential metrics that shows PT Prakarsa Enviro's ability to generate profits relative to its revenue, costs, and other financial aspects, which is particularly significant in the context of a private placement initiative. The profitability will be evaluated through three key ratios, Gross Profit Margin, which examines the proportion of revenue that exceeds the cost of goods sold, Operating Profit Margin, which measures how much of the revenue is left after paying variable costs of production such as wages and raw materials, and Net Profit Margin, which indicates the percentage of revenue remaining after all operating expenses, taxes, and other expenses have been deducted. These ratios are crucial for potential investors in a private placement, as they would want to understand the company's ability to generate profits and manage costs efficiently. Figure 10. DER Sensitivity Analysis (Source: Author Analysis) 56 Table 5. Historical Profitability Ratio 2017 – 2021 (Source: Author Analysis) The Gross Profit Margin is a significant indicator of a company's financial health as it reveals the proportion of revenue that exceeds the cost of goods sold. For PT Prakarsa Enviro, the Gross Profit Margin exhibited fluctuations from 2017 to 2021. In 2017, it was 37%, which then dropped sharply to 19.6% in 2018, but partially recovered to 23.2% in 2019. Interestingly, there was a notable spike to 61.1% in 2020, which again receded to 38.9% in 2021. These fluctuations in Gross Profit Margin can be indicative of changes in cost structures, pricing strategies, or market conditions. From the perspective of a private placement initiative, potential investors would likely analyze these trends closely. The significant surge in 2020 could be seen as a positive indicator, but the inconsistency in the margin over the years might cause some reservations. It is essential for PT Prakarsa Enviro to present a coherent explanation for these fluctuations and demonstrate that the company has strategies in place to sustain and improve its profitability, as this would be critical for attracting investors in a private placement. The Operating Profit Margin is crucial in assessing a company’s operational efficiency and its ability to generate profits from its core business activities. For PT Prakarsa Enviro, the Operating Profit Margin showed a mixed trend between 2017 and 2021. In 2017, the margin was relatively low at 1.1%, followed by an improvement to 9.9% in 2018 and a slight decrease to 8.3% in 2019. The margin peaked at 12.0% in 2020, but alarmingly turned negative to -7.8% in 2021. This negative operating profit margin in 2021 indicates that the company's core business operations failed to cover operating expenses, which is a red flag for financial health. In the context of a private placement initiative, such inconsistency and the recent negative margin could make potential 57 investors cautious. It is essential for PT Prakarsa Enviro to address the underlying causes of the negative margin in 2021, and to communicate strategies for improving operational efficiency and profitability. Prospective investors in a private placement will likely scrutinize the company’s ability to sustainably generate profits from its primary operations before making an investment decision. The Net Profit Margin reflects a company’s ability to convert sales into actual profit after all expenses and taxes have been accounted for. PT Prakarsa Enviro’s net profit margins from 2017 to 2021 have been relatively low, which could indicate thin profitability. The company started with a negative net profit margin of -0.2% in 2017, which means it incurred a loss. However, it managed to achieve positive margins in the subsequent years, with 2.9% in 2018, 1.6% in 2019, 1.8% in 2020, and 1.7% in 2021. While it's encouraging that the company has maintained positive net profit margins after 2017, the margins are still quite slim. In the context of financial health, this suggests that the company is only generating a small amount of profit for each unit of sales, which could be a concern in terms of its ability to accumulate retained earnings and reinvest in the business. For a private placement initiative, potential investors may perceive the low net profit margins as a sign of limited profitability potential. PT Prakarsa Enviro should, therefore, focus on strategies to optimize costs and enhance operational efficiencies to improve net profit margins, which could make it more appealing for potential investors in the private placement. PT Prakarsa Enviro Indonesia's financial health, as assessed through gross profit margin, operating profit margin, and net profit margin, exhibits variability which may warrant caution for potential investors in a private placement initiative. The considerable fluctuations in the gross profit margin, the notable dip into negative territory in the operating profit margin in 2021, and the consistently slim net profit margins indicate potential challenges in cost management and operational efficiency. For a successful private placement, PT Prakarsa Enviro Indonesia will need to articulate a solid strategy that demonstrates how the capital raised will be deployed to enhance operational efficiencies and profitability. The investor’s emphasis will likely be on understanding how the company plans to mitigate the observed vulnerabilities in its profitability metrics and set a trajectory for stable and sustainable growth. 58 4.1.3.1 Sensitivity Analysis The negative and very low OPM and NPM indicates potential challenges in cost management and operational efficiency. This challenge should be overcome and reflected on financial statement by having positive OPM and higher NPM. This can be achieved by decreasing the expense of the company. The sensitivity analysis showing the relation of decreasing expense and the improvement of OPM and NPM. The company should reduce their expense at least 20% to have positive OPM and higher NPM than before. 3.2 Valuation of PT Prakarsa Enviro Indonesia The value of PT Prakarsa Enviro Indonesia will be explored in this sub-chapter.