Credit Analysis: WORM PURPLE LTD

1. Credit Opinion: CONDITIONAL

Worm Purple Ltd presents a mixed credit profile. While short-term liquidity is adequate and cash reserves appear stable, the company has experienced a severe erosion of net worth over recent years that raises material concerns about financial resilience and repayment capacity. Any credit facility should be subject to enhanced covenants, reduced tenor, and potentially personal guarantees from the directors.

Key concern: Net assets have declined by approximately £285,000 (65%) since FY2021, indicating sustained trading losses or significant write-offs. Although the rate of decline has slowed materially in FY2025, the company has not yet demonstrated a return to meaningful profitability.

2. Financial Strength

Balance Sheet Trajectory – Alarming Deterioration

The balance sheet tells a concerning story:

• Catastrophic loss period (FY2021-FY2023): Net assets collapsed from £436k to £91k, representing approximately £345k in accumulated losses over two years. This warrants detailed inquiry – was this a single major contract failure, sector downturn, or structural issue?
• Partial recovery (FY2024): Net assets rebounded to £152k, suggesting either a profitable year or asset revaluation/deferred tax adjustment
• Stagnation (FY2025): Net assets declined by only £1,945, indicating near-breakeven performance

Capital Structure: - Share capital remains nominal at £200 - Entire equity base is constituted by retained earnings (P&L reserve), making the business highly dependent on continued trading performance - Gearing is moderate: Total liabilities (£253,618) represent 1.69x net assets – acceptable but not strong

Long-term liabilities are being reduced (£211k → £137k), which is positive and suggests active debt management.

3. Cash Flow Assessment

Liquidity Position – Adequate but Deteriorating

Positive indicators: - Current ratio of 1.81x provides reasonable headroom - Cash position has stabilised at ~£169k (flat year-on-year) - Stock levels are minimal (£4.4k), appropriate for an IT services business - Working capital of £204k provides a buffer for near-term obligations

Concerning indicators: - Net current assets have declined by £64k (24%) year-on-year - Debtors have reduced from £341k to £285k – this could indicate either improved collections or declining revenue - The stable cash position combined with declining current assets suggests the business may be consuming working capital to fund operations - Provisions of £15k remain on the balance sheet (down from £22k) – nature unspecified but could relate to contractual or employment obligations

Debt service capacity: Without profit & loss data (small company exemption), we cannot calculate interest cover or debt service coverage ratios. The £1,728 current tax charge in FY2025 (vs nil in FY2024) suggests marginal profitability, insufficient to comfortably service significant new debt.

4. Monitoring Points

Critical Metrics to Watch:

1. Return to profitability: The P&L reserve must stabilise and grow. Request management accounts to verify trading performance since the February 2025 year-end.

2. Debtor trajectory: Debtors declined 17% YoY (£341k → £285k). Clarify whether this reflects improved credit control or contracting revenue.

3. Long-term creditor reduction: The £74k reduction in long-term liabilities is positive, but understand the repayment schedule – is this scheduled amortisation or early repayment from cash reserves?

4. Provisions nature: £15k in provisions requires clarification – are these contingent liabilities that could crystallise?

5. Revenue visibility: As an IT services business with 14 employees, request pipeline and contract information to assess forward revenue certainty.

6. Key-person risk: Husband-and-wife ownership (Mark and Xxxxxx Xxxxxxxxname shown to subscribers) creates concentration risk. What succession or key-person insurance is in place?

7. Historical loss explanation: The FY2021-FY2023 deterioration requires a credible narrative before extending meaningful credit.

Recommended Facility Structure: - Maximum tenor: 24 months - Personal guarantees from both directors - Financial covenants: Minimum net assets of £120k; current ratio not below 1.5x - Quarterly management accounts to be provided - Consider debenture/fixed charge over company assets

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