Question

Financial Statement Analysis Modern Building Supply, Inc. Modern Building Supply sells various building materials to retail outlets. Listed below are its financial statements for the past two years.

This Year Last Year $ 90 $ 650 1,160 30 1,930 2,000 3,930 $ 200 501 500 900 201 1,670 1,830 3,500 $ Modern Building Supply Comparative Balance Sheets (amounts in 000's) Assets Current Assets: Cash Short-term Investments Accounts Receivable Inventory Prepaid Expenses Total Current Assets Plant and Equipment, Net Total Assets Liabilities and SIE Liabilities: Accounts Payable Wages Payable Other Payables Current Liabilities Notes Payable (12% annual interest) Total Liabilities Stockholders' Equity Common Stock Retained Earnings Total Equity Total Liab. And Equity 660 70 230 960 750 520 501 1301 700 750 $ $ 1,710 1,450 700 1,520 2,220 3,930 $ 7001 1,350 2,050 3,500 $ Comparative Income Statements Sales Less Cost of Goods Sold Gross Profit Less Operating Expenses Operating Income This Year Last Year $ 7,000 $ 6,000 5,530 4,800 1,4701 1,200 930 7101 540 490

The company, MBS, has just approached State Bank requesting a $300,000 short-term loan for working capital purposes. Would you make the loan? Use the information provided above to help make your decision. Use as many ratios as needed.

Answer 1

I would NOT provide the loan for the following reasons:

1) Current ratio signifies the liquidity of a company. Since the bank is giving a short term loan, it will be concerned by the short term liquidity of the company.

Current Ratio of MBS is 2.01 : 1 which is lower than indutry average.

2) Return on assets signifies how well the company can use its assets to generate profits.

It is 7.2% for MBS which is again below industry averages.

3) Inventory turnover in days and account receivable days signify how good a company is at managing its inventory and debtors respectively. They stand at 76.5 and 33.89 for MBS which are much higher ( higher the worse) than industry averages.

4) Times interest earned says how well can a company pay back its interest expenses. Although it is better than industry average, the above points pose a much stronger argument to not give the loan.

Calculations:

current ratio = current assets / current liabilites

current ratio= 1930 / 960

current ratio= 2.01

Average days receivable = (account receivable x 365)/sales

Average days receivable = (650 x 365)/7000

Average days receivable = 33.89

Inventory turnover in days = (inventory x 365)/COGS

Inventory turnover in days = (1160 x 365)/5530

Inventory turnover in days = 76.5

Times interest earned = earning before interest and taxes/ interest expense

Times interest earned = 540/90

= 6 times

Return on assets = net income / average total assets

Return on assets= 270/ 3715

Return on assets= 7.2%