Question

Current Situation
Milan Fashions is ultimately looking to expand its manufacturing operations and this means selling more of its products via the internet. The company saw it would have to do the following:
Expand their presence on the internet by enhancing the company’s website. This meant making it more interactive as well as innovative. Here a potential customer would have the ability to design a coat or outerwear online given the fabric, styles, and designs that the company had available. This would allow the customer to be creative and add more accessories to the coat and have an idea what the item would cost. This type of custom-made coat or outwear would allow the customer to have variety in their styles and design, and stay within their budget.
The enhancement of the online sales would also mean a possible creation of a customer service department to handle technical issues as well as customer complaints. These were bound to happen since there will always be some errors in the manufacturing process or with the online system.
The manufacturing operations would have to be enhanced and rearranged in order to handle unique customer orders. This meant having the variety of fabrics and materials available for the coats and outwear, the cutting of the fabrics and materials, and assembling, inspecting, and preparation for shipment of the order. With enough orders coming in, then there would be little to no idle time of the employees in the manufacturing facility.
The logistics could be handled by working with noted delivery companies which could ship the completed product from the manufacturing facility as soon as the item was completed. There would be an extra charge for delivery on rush orders.

Financial Information
Joseph and Thomas decided to first approach the bank where they had a line of credit and had received business loans in the past, First United. They had approached the bank on numerous occasions for small and large loans and this would be the largest they had ever applied for. After consulting with the relationship manager at the bank, Joseph and Thomas would need to provide the bank with their income statements and balance sheets from 2012 to 2016. From there the bank’s commercial lending officer and credit analyst would perform the following ratio analysis:
Current ratio Long-term debt-to-Equity ratio Debt-to-Equity ratio Total Debt ratio Financial leverage ratio Inventory turnover Fixed asset turnover Debt-to-Capital ratio Interest coverage ratio Return on Assets

Assignment:
First United Bank Paterson, New Jersey Serving the Greater Paterson Community since 1949
To: Associate Credit Analyst
From: Ralph Vicente – Senior Vice President, Commercial Loan Division
Date: March 9, 2017
Re: Milan Fashions Coat Company

The Milan Fashions Coat Company produces and sells to retail stores various types of coats and outerwear including women’s, children’s and men’s outer garments. They are looking to expand and diversify their product line and sell on-line so they are coming to us for a $3 million commercial loan. The company’s five most recent balance sheets and income statements were presented to First United in order to support their loan request. As you can see from the attached income statements and balance sheets from 2012 to 2016, they have had increases in net sales since 2012 but their net income has been up and down for the same time period.

The amount requested is broken down as:
Expand, enhance, and maintain company website $1,000,000
Expand and enhance manufacturing operations $1,500,000
Creation and maintenance of customer service center $500,000
Total loan request $3,000,000

Milan Fashions Coat Company has been a long-time client of the bank and borrowed funds from us on previous occasions. The company has grown in terms of sales, assets, and equity; however, this is the largest loan that the company has ever applied for in their entire history.

I would like you to analyze the company’s loan request and financial statements. You must provide the following:
A. Calculate the financial ratios for 2016 and 2015 comparing them to the industry norms found on the page following the financial statements.
B. 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?
C. Based upon your financial ratio analysis, what questions would you like to propose to management to gain clarity on the business operations?
D. Based upon the financial ratio analysis you will have performed on Milan Fashions, would do you recommend that there should be an approval of the loan request? I want you to state your analysis in a detailed memorandum to me by Monday of next week. I would like to discuss your analysis and hear your ideas on Milan Fashions in a meeting on Tuesday. The clients will be in our offices next Friday to discuss their loan request. Please feel free to contact me if there are any questions on this matter.

Milan Fashions Income Statements As of December 31st, 2012, to 2016

Revenues	2016	2015	2014	2013	2012
Net Sales	777,228	774,635	772,897	770,524	768,126
Rental Income	36,000	36,000	36,000	36,000	36,000
Total Revenues	813,228	810,635	808,897	806,524	804,126
Costs and Expenses
Cost of sales	325,848	315,698	313,548	312,587	311,523
Operating, Selling, General & Administrative Expenses	82,653	80,564	79,012	78,245	77,428
Depreciation	325,789	335,648	337,840	332,587	331,429
Operating income	78,938	78,725	78,497	83,105	83,746
Interest
Debt	2,525	2,755	2,874	2,984	2,845
Capital leases	1,235	1,336	1,125	1,249	1,352
Interest Income	(198)	(180)	125	115	89
Interest, net	3,958	4,271	3,874	4,118	4,108
Income from continuing operations before income taxes	74,980	74,454	74,623	78,987	79,638
Provision for income taxes
Current income tax expense	8,201	7,902	7,525	7,684	7,489
Deferred income tax expense	(1,023)	(946)	876	782	658
Total provision for income taxes	9,224	8,848	6,649	6,902	6,801
Income form continuing operations	65,756	65,606	67,974	72,085	72,837
Income (loss) from discontinues operations, net of income taxes	0	(657)	525	125	257
Net Income	$65,756	$64,949	$68,499	$72,210	$73,094

Milan Fashions Balance Sheets As of December 31st, 2012, to 2016

Assets	2016	2015	2014	2013	2012
Cash and cash equivalents	$889,200	$844,470	$950,251	$925,000	$901,250
Receivables, net	748,505	787,900	725,253	625,879	610,253
Inventories	55,070	60,600	50,161	45,232	40,649
Prepaid expenses	83,395	69,900	52,124	32,589	98,536
Current assets of discontinued operations	0	(32,589)	215	350	450
Total Current Assets	1,807,600	1,698,851	1,778,004	1,629,050	1,651,138
Property and Equipment
Property, plant and equipment, gross	350,000	400,000	300,254	250,623	200,623
Less: Accumulated depreciation	(90,500)	(100,789)	(80,456)	(75,239)	(50,467)
Property, plant and equipment, net	259,500	219,798	175,384	150,156	299,211
Property under capital leases
Property under capital leases	759,900	700,564	698,425	658,954	745,000
Less: Accumulated amortization	(434,316)	(425,687)	(415,687)	(400,253)	(425,800)
Property under capital leases, net	325,584	274,877	282,738	258,701	319,200
Goodwill	15,860	15,559	14,625	13,568	12,569
Other assets and deferred charges	689,577	689,908	568,356	558,239	568,542
Total Assets	$3,131,478	$2,989,372	$2,855,660	$2,658,979	$2,641,106

Liabilities	2016	2015	2014	2013	2012
Current Liabilities
Short-term borrowings	$50,000	$90,074	$41,922	$35,698	$37,894
Accounts Payable	8,180	5,000	5,250	5,236	5,258
Accrued Liabilities	4,818	6,239	5,698	5,000	4,689
Accrued Income Taxes	4,400	4,000	4,134	4,036	4,235
Long-term debt due within 12 months	13,760	20,500	19,438	25,120	28,369
Obligation under capital leases due within 12 months	2,760	2,400	2,008	2,958	895
Total current liabilities	83,918	128,213	78,450	78,048	81,340
Long-term debt	88,160	90,000	87,636	92,000	95,456
Long-term obligations under capital leases	94,480	41,048	47,872	44,658	45,254
Deferred income taxes	14,480	14,500	15,498	16,879	17,568
Total liabilities	281,038	273,761	229,456	231,585	239,618
Equity
Common stock	2,728,000	2,625,411	2,543,800	2,345,894	2,280,879
Capital in excess of par value	34,640	28,200	35,040	35,235	32,232
Retained Earnings	17,800	12,000	15,684	15,687	14,127
Accumulated other comprehensive income (loss)	70,000	50,000	31,680	30,578	74,250
Total equity	2,850,440	2,715,611	2,626,204	2,427,394	2,401,488
Total liabilities and equity	$3,131,478	$2,989,372	$2,855,660	$2,658,979	$2,641,106

Industry Financial Ratio Standards

Ratio	Industry Norm	Milan Fashion Ratios 2015	Milan Fashion Ratios 2016	Evaluation
Current ratio	4.5 times
Long-term debt-to-Equity ratio	12%
Debt-to-Equity ratio	30%
Total Debt ratio	20%
Financial leverage ratio	1.10
Inventory turnover	7 times
Fixed asset turnover	1.8 times
Debt-to-Capital ratio	43.4%
Interest coverage ratio	5.0 times
Return on Assets	8.4%

Answer 1

• Current ratio = Current assets/ Current liabilities

2015: Current ratio = 1,698,851/ 1,28,213 = 13.25

2016: Current ratio = 1,807,600/ 83,918 = 21.54

- Since the current ratio, i.e. the ability to meet short term liabilities with current assets, has increased, it it a GOOD SIGN.

.............................

• Long term Debt to equity ratio = Short term debt + Long term debt/ Equity

2015: Long term Debt to equity ratio = 273,761 /2,715,611 = 0.1008

2016: Long term Debt to equity ratio = 281,038 /2,850,440 = 0.098

- Since the Long term Debt to equity ratio, i.e. the ratio of total debt to total equity, has decreased, it it a GOOD SIGN.

.............................

• Debt to equity ratio = Long term debt/ Equity

2015: Debt to equity ratio = 90,000 /2,715,611 = 0.033

2016: Debt to equity ratio = 88,160 /2,850,440 = 0.030

- Since the Debt to equity ratio, i.e. the ratio of long term debt to total equity, has decreased, it it a GOOD SIGN.

.............................

• Total debt ratio = Total Liabilities/Total assets

2015: Current ratio = 273,761/ 2,989,372 = 0.0915

2016: Current ratio =281,038/ 3,131,478 = 0.089

- Since the Total Debt ratio, i.e. the ratio of total liabilities to total assets, has decreased, it it a GOOD SIGN.

.............................

• Inventory Turnover ratio = Cost of goods sold (COGS) / Average inventory

2015: Inventory Turnover ratio = 3,15,698/ [(5,161+ 60,600)/2]

= 3,15,698/ 55,380.5

= 5.7

2016: Inventory Turnover ratio = 3,25,848/[ (60,600+55,070)/2]

=3,25,848/ 57,835

= 5.634

.............................

• Fixed assets Turnover ratio = Cost of goods sold (COGS) / Fixed assets at year end

2015: Fixed assets Turnover ratio = 3,15,698/ 5,10,234 = 0.6187

2016: Fixed assets Turnover ratio = 3,25,848/ 6,00,944= 0.542

.............................

• Debt to Capital Ratio = Interest bearing Debt / Interest bearing Debt + Equity

2015: Debt to Capital Ratio = 1,53,948 /(2,715,611+1,53,948) = 0.1008

2016: Debt to Capital Ratio = 1,99,160 / (2,850,440+1,99,160) = 0.065

.............................

• Interest coverage ratio=Earnings before Interest & Tax/ Interest

2015: Interest coverage ratio= 78,725/ 4,091 = 19.24

2016: Interest coverage ratio= 78,938/ 3,760= 20.99

.............................

• Return on assets ratio = Net Income/ Tota Assets

2015: Return on assets ratio= 64,949/ 2,989,372 = 0.0217

2016: Return on assets ratio​​​​​​​= 65,756/ 3,131,478 = 0.021