Question

1. Assume you are an agricultural loan officer for a bank, and a customer requests a loan based on the following balance sheet. Conduct a ratio analysis and give your reasons for granting or denying an additional loan. What is the weakest part of this customer's financial condition? Assets Current Assets Noncurrent Assets $40,000 $160,000 $40,000 $60,000 Liabilities Current Liabilities Noncurrent Liabilities Total Liabilities Owner Equity Total Liabilities plus Equity $100,000 $100,000 $200,000 Total Assets $200,000

Answer 1

Answer-

Liquidity:

Current ratio = Current assets / Current liabilities

                      = $40,000 / $40,000

                      = 1

Working capital = Current assets – Current liabilities

                           = 40,000 – 40,000

                           = $0

Solvency:

Debt/asset ratio = Total liabilities / Total assets

                           = 100,000 / 200,000

                           = 0.50

Equity/asset = Owner equity / Total assets

                    = 100,000 / 200,000

                    = 0.50

Debt/equity ratio = Total liabilities / Owner equity

                           = 100,000 / 100,000

                           = 1

Net capital ratio = (Noncurrent liabilities + Owner equity) / Noncurrent assets

                           = (60,000 + 100,000) / 160,000

                           = 160,000 / 160,000

                           = 1

Debt structure ratio = Current liabilities / Noncurrent liabilities

                                 = $40,000 / $60,000

                                 = 0.67

Comments:

Liquidity: Weak

The customer has weak liquidity, since working capital is zero and current ratio is 1. It means the ability of customer is poor in terms of converting assets into cash.

Solvency: Strong

This is the debt-paying ability of the customer, which is good since the business is owner-based but not loan-based. Out of total assets debt is only 0.50 and equity is 1; it means the owner has full control over the business. Debt/equity ratio and net capital ratio are also in favor of solvency. The debt structure indicates 1.1; it means out of total liabilities, the amount of noncurrent liabilities is higher; it indicates that most of the liabilities are in long-run, which makes not strong solvency in the long-run.

This customer has a poor liquidity position, but a relatively strong solvency position.Which means they have more equity in the business. No I would not give them a loan.You must have strong liquidity for a bank to know that you will meet your payments.