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

Answer:

In order to determine whether the company is worthy of $10 million short term loan to grow the business, we would take the help of last available balance sheet of the company.

With the assistance of asset report, we can figure different proportions to decide the money related wellbeing of the organization, its capacity to benefit obligation and its development potential.

We can take the assistance of following proportions to decide the credit qualification:

1) Quick ratio-

Quick ratio= (Current assets-Inventory)/Current liabilities

The speedy proportion of the organization estimates the organization capacity to meet its momentary commitments with most fluid resources of the organization. The higher the proportion, the more grounded is the situation of the organization.

2) Current Ratio

Current Ratio=Current Assets/Current liabilities

If the current ratio is less than 1 means that the current liabilities are higher than the current assets of the company & so the company may be having cash flow problems to meet short term obligations.

It holds true even for companies having a big reserve of fixed assets as its major investment is locked in fixed assets hence posing difficulty in meeting day to day operations

3) Debt equity ratio-

a) Total debt equity ratio-total debt/shareholder's equity

b) Long term debt equity ratio-long term debt/shareholder's equity

c) Short term debt equity ratio-short term debt/shareholder's equity

The objective of these ratios is to see how the company is financing its growth

A high debt equity ratio means that the major financing is through debt which increases the interest burden.

d) Debt ratios-

Momentary obligation/add up to obligations A high proportion implies that every real obligation are present moment and consequently the organization would require to satisfy in prompt future, affecting its money floew positione) Return on Equity (ROE)

ROE=Net profit after tax/shareholder's equity

ROE is the clearest indicator of how well the company the company uses the resources available to generate profit