Evaluate the company\'s short-term and long-term credit worthiness based on fina
ID: 2812349 • Letter: E
Question
Evaluate the company's short-term and long-term credit worthiness based on financial performance and trend (comparing this year to last year). Include in your evaluation:
Information about performance and trends.
Information about other relevant financial information you consider important to the decision.
Your recommendation regarding whether the bank should grant the loan based on the financial data.
Total debt to equity
2017 - 16,800/6,747 = 2.49 times
2016 - 17,000/4,500 = 3.78 times
Gross profit rate (gross margin %)
2017 10,000/20,000 = 50%
2016 8,500/18,000 = 47.2%
Net Profit Rate (Net margin %)
2017 -3,247/20,000 = 16.2%
2016 - 2,520/18,000 = 14%
2017 on the left- 2016 on the right.
Net sales $20,000 $18,000
Cost of goods sold 10,000 9,500
Gross profit 10,000 9,500
Operating income 6,000 4,800
Interest expense 588 600
Income before income tax 5,412 4,200
Income taxes 2,165 1,680
Net income $3,247 $2,520
Explanation / Answer
based on the financial data given :
An ideal debt equity ratio should be below 2 .In this case the debt equity ratio although fallen in comparison to the previous year, which shows that teh company is consistently paying off debt but is stil above 2.
the gross profit ratio is 50% but the net profit is only 16% which shows that the company is already tied down with too many operating expenses as indicated by the balance sheet Although the company has performed better than the previous year but it's operating expenses are increasing.
the abiity of the business to pay back loan is determined by the interest coverage ratio,
which in this case is EBIT/ INTEREST = $6000/ 588= 10.2
Now taking on more debt will add on to the interest expenses , seeing the company is growing in compariosn to previous year we can also expect the EBIT to rise. an interst coverage ratio of above 2 is the minimum acceptable amount for a company generating solid,consistent revenues.
Although the company is in a position to pay back loan, keeping in mind that it is growing year on year, the company should bring down it's operating expenses so that the net profit after paying back the interest expense is higher as the the interest coverage ratio is good enough to pay back debt, reducing operting expenses can increase the profit potential of the business even after taking additional interest expenses on raising additional debt. The debt equity ratio although above 2, is not significantly higher to raise concern. the company is looking more loans to grow further and i guess the loan could be sanctioned.
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