Question

You are a student member of a business case competition. You and two other teammates are in charge of analyzing the financial position of a company and making a recommendation to a senior loan officer of Santander as to whether the company is worthy of a $10 million dollar short term loan to grow the business. You are only allowed to examine one audited financial statement to make your recommendation. Which one would you choose and what information would the statement provide that would be useful to support your recommendation?

Answer 1

I will choose balance sheet.

Through examining whether the company is able to meet its liabilities, it is important to know the liquidity position of the firm. The company will be paid 10 million dollar short term loan only when it has a sound liquidity position.Liquidity ratios will reveal the capacity of a firm to meet its short term obligations out of its short term resources.Creditors, commercial banks ,short term lenders are interested in liquidity ratios as they get an exact picture of short term financial position of the concern.Liquidity ratios include the following:

(1)Current ratio-establishes the relationship between current assets and current liabilities.It checks whether the firm has enough resources to meet its short term obligations .We use both those components from balance sheet like cah and cash equivalents,inventories,trade receivables,short term advances etc.Higher ratio indicates higher solvency position and gives more protection to short term creditors.Current ratio=current assets/current liabilities.

(2)Quick ratio-establishes the relationship between quick assets and current liabilities.It indicates whether the firm has ability to meet its current liabilities within a month or immediately.It is considered as best test of short term financial position of a concern because it gives more importance on the immediate conversion of assets into cash.Quick ratio=quick assets(current assets -prepaid expenses and inventory)/current liabilities.

(3)Absolute liquidity ratio-It explains the relationship between absolute liquid assets(quick assets-trade receivables) and current liabilities.

  

A short term loan is a valuable option, especially for small businesses or start-ups that are not yet eligible for a credit line from a bank. The loan involves lower borrowed amounts, which start from $100 to as much as $100,000. Short term loans are suitable not only for businesses but also for individuals who find themselves in a temporary, sudden financial problem.

Thus we should check and verify the balance sheet to analyze the company's existing assets and liabilities by interpreting the ratios and the past performance of the company.