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Financial

The company shows strengths in improved profitability, stronger working capital, reduced debt, and better inventory management, but faces challenges with decreasing liquidity, slower collections, and lower gross margins compared to industry averages. The recommendation on granting a loan is marginal, suggesting further analysis of the company's business plan and competitive landscape is necessary. If a loan is considered, it is advised to negotiate stricter terms and closely monitor the company's financial performance.

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Shimizu Kiyoko
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4 views4 pages

Financial

The company shows strengths in improved profitability, stronger working capital, reduced debt, and better inventory management, but faces challenges with decreasing liquidity, slower collections, and lower gross margins compared to industry averages. The recommendation on granting a loan is marginal, suggesting further analysis of the company's business plan and competitive landscape is necessary. If a loan is considered, it is advised to negotiate stricter terms and closely monitor the company's financial performance.

Uploaded by

Shimizu Kiyoko
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The following are financial ratios of a company this year and last year, respectively:

Working capital P 960,000 ; P 870,000


Current ratio 1.87 ; 2.45
Acid-test ratio 0.67 ; 1.08
Average age of receivables: 27.4 days ; 22.8 days
Inventory turnover 5.1 times ; 6.3 times
Debt-to-equity ratio 0.86 ; 0.69
Times interest earned 7.0 times ; 5.4 times

The following is the company's balance sheet in common size form this year and
last year, respectively:
Current assets:
Cash 2.3 % ; 6.1 %
Marketable securities 0.0 ; 1.5
Accounts receivable, net 16.3 ; 12.1
Inventory 32.5 ; 24.2
Prepaid expenses 0.5 ; 0.6
Total current assets 51.5 ; 44.5
Plant and equipment, net 48.5 ; 55.5
Total assets 100.0 % ; 100.0 %
Liabilities:
Current liabilities 27.5 % ; 18.2 %
Bonds payable 18.8 ; 22.7
Total liabilities 46.3 ; 40.9
Equity:
Preference shares, P50 par, 8%: 5.0 ; 6.1
Ordinary shares, P10 par: 12.5 ; 15.2
Retained earnings 36.3 ; 37.9
Total equity 53.8 ; 59.1
Total liabilities and equity 100.0 % ; 100.0 %
The following is the company's income statement is common size form this year and
last year, respectively:
Sales 100.0 % ; 100.0 %
Less cost of goods sold 77.1 ; 80.0
Gross margin 22.9 ; 20.0
Less operating expenses 13.9 ; 11.8
Net operating income 9.0 ; 8.2
Less interest expense 1.3 ; 1.5
Net income before taxes 7.7 ; 6.7
Less income taxes 3.1 ; 2.7
Net income 4.6 % ; 4.0 %

The following ratios are typical of firms in the building supply industry:
Current ratio 2.5
Acid test ratio 1.2
Average age of receivables 18 days
Inventory Turnover in days: 50 days
Debt to equity ratio 0.75
Times interest earned 6.0 times
Return on total assets 10%
P/E ratio : 9
Net income as a percentage of sales: 4%

Question: what problems and strengths do you see existing in the company? Make a
recommendation as to whether a loan should be made
Strengths of the company:
 Improved profitability: The company's net income as a percentage of sales
has increased from 4% to 4.6%, indicating improved profit margins.
 Stronger working capital: The working capital has increased from
P870,000 to P960,000, suggesting increased liquidity and ability to meet
short-term obligations.
 Reduced debt: The debt-to-equity ratio has improved from 0.86 to 0.69,
indicating the company is relying less on debt financing.
 Improved times interest earned: The times interest earned ratio has
increased from 5.4 to 7.0, indicating the company has a better ability to
cover its interest expenses.
 Inventory management: The inventory turnover ratio has improved from
5.1 times to 6.3 times, suggesting the company is managing its inventory
more efficiently.
Potential problems:
 Decreasing liquidity: Although working capital improved, the current and
acid-test ratios have both declined from their respective averages in the
industry, indicating a potential decrease in short-term liquidity.
 Slowing collections: The average age of receivables has increased from
22.8 days to 27.4 days, suggesting the company may be facing difficulties
collecting payments from customers.
 Lower gross margin: The gross margin has decreased from 22.9% to 20%,
indicating the company is facing higher costs of goods sold or lower selling
prices.
 Below-average industry performance: The company's return on total
assets is below the industry average of 10%, suggesting it may not be
generating profits as efficiently as its competitors.
Recommendation on Loan:
Based on the analysis, the decision to grant the loan is marginal. While the
company has shown some improvements in profitability and debt management,
there are concerns regarding its declining liquidity, increasing collection period, and
lower-than-average industry performance.
It would be advisable to:
 Gather more information: Conduct a thorough analysis of the company's
business plan, its competitive landscape, and future growth prospects to
better understand its ability to repay the loan.
 Negotiate loan terms: If a loan is granted, consider setting stricter loan
covenants or requiring the company to implement specific plans to improve
its liquidity and collection practices.
 Monitor the company's performance: Closely monitor the company's
financial performance after granting the loan to ensure it meets the agreed-
upon terms and conditions.
It is crucial to weigh both the strengths and weaknesses of the company in
conjunction with additional information about its business activities and future plans
before making a final decision regarding the loan.
.

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