Question

Question: Of the financial ratios that are used for the industry standard, which do you feel are most important when determining whether First United should approve the loan to Milan Fashions? What do you feel are the strong and weak points of the company in your financial analysis?

Industry Financial Ratio Standards

Ratio	Industry Norm	Milan Fashions Ratios 2015	Evaluation*
Current ratio	4.5 times	13.25	Good
Long-term debt-to-Equity ratio	12%	5.36%	Good
Debt-to-Equity ratio	30%	10.08%	Good
Total Debt ratio	20%	9.16%	Good
Financial leverage ratio	1.10	1.1	Fair
Inventory turnover	7 times	6 times	Poor
Fixed asset turnover	1.8 times	2.99 times	Good
Debt-to-Capital ratio	43.4%	10.32%	Good
Interest coverage ratio	5.0 times	18 times	Good
Return on Assets	8.4%	2.15%	Poor

Ratio	Industry Norm	Milan Fashions Ratios 2016	Evaluation*
Current ratio	4.5 times	21.54	Good
Long-term debt-to-Equity ratio	12%	6.92%	Good
Debt-to-Equity ratio	30%	9.86%	Good
Total Debt ratio	20%	8.97%	Good
Financial leverage ratio	1.10	1.1	Fair
Inventory turnover	7 times	6 times	Poor
Fixed asset turnover	1.8 times	2.6 times	Good
Debt-to-Capital ratio	43.4%	10.17%	Good
Interest coverage ratio	5.0 times	20 times	Good
Return on Assets	8.4%	2.22%	Poor

*Possible ratings: Good (Highest); Fair (Middle); Poor (Lowest)

Answer 1

Ratio	Industry Norm	Milan Fashions Ratios 2015	Evaluation*	meaning
Current ratio	4.5 times	13.25	Good	It is a measure of liquidity
Long-term debt-to-Equity ratio	12%	5.36%	Good	It reflects the relative claims of creditors and shareholders against the assets of the firm.
Debt-to-Equity ratio	30%	10.08%	Good	It reflects the relative claims of creditors and shareholders against the assets of the firm.
Total Debt ratio	20%	9.16%	Good	It reflects the relative claims of creditors and shareholders against the assets of the firm.
Financial leverage ratio	1.1	1.1	Fair	it reflects the burden of fixed financial charges.
Inventory turnover	7 times	6 times	Poor	it reflects how fast inventory is sold
Fixed asset turnover	1.8 times	2.99 times	Good	It indicates the efficiency with which firm uses all its assets to generate sales
Debt-to-Capital ratio	43.40%	10.32%	Good	it indicates the debt part in whole capital of the firm.
Interest coverage ratio	5.0 times	18 times	Good	It measures the fir's ability to make contractual interest payments
Return on Assets	8.40%	2.15%	Poor	It measures the overall effectiveness of the management in generating profits with its available assets.

In my views first united should approve the loan as its overall ratios looks good. especially debt equity ratio which shows the equity part in the company.

As most of the ratios are good as compared to industry norms most importantly current ratio, interest coverage ratio, Debt equity ratio.

Co. has enough liquidity as its current ratio is good. It has enough cash to repay its liabilities.

Return on assets is quite low which could be improved by utilising its assets in more efficient manner.

Inventory turnover is also low which shows the excess funds which the company have and are not able to use it efficiently.

Its fixed financial charges are fair means if the firm gets the loan its fixed charges has increased which could be a issue for future if its income does not increase.

As of now by looking the ratios of the milan fashion, first united should approve the loan.

Please check with your answer and let me know.