Question

. Baker & Co. has applied for a loan from Trust Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry.

An analyst from the Bank had complied the following ratios for two consecutive years 2008 and 2009 for Baker & Co. The results are given below.

	2009	2008	Industry Avg 2009
Current Ratio	4.3 x	5.7x	5.0x
Acid Test (Quick) Ratio	2.1x	2.8x	3.0x
Inventory Turnover	1.0x	1.31x	2.2x
Avg Collection Period	91.25	80	90
Debt to Total Asset	33%	28%	33%
Times Interest Earned	5.0x	6.0x	7.0x
Total Asset Turnover	.46x	.54x	.75x
Fixed Asset Turnover	.92x	.99x	1.00x
Operating Profit Margin	29.1%	25.6%	20.0%
Net Profit Margin	15.36%	14.06%	12.00%
Return on total Assets	7.10%	7.54%	9.00%
Return on Equity	10.53%	10.51%	10.43%

REQUIRED: Discuss the firm's Strength's and Weaknesses. Include in your explanation as to why you consider the results to be a strength or a weakness. Should the Bank make the loan? Why or why not?

Answer 1

According to the given result, the firm's strengths are as follows-

A. Operating profit margins of company have been an increasing Trend and it can be seen that it has increased its operating profit to the extent of 17 % from last year and it is also better than the overall industry.

B. Net profit margin has also subsequently increased for the company because it is performing better than the industry on this front and it has also increased its profit from the last year.

C. Return on equity for this company had subsequently increased because it is performing better than its industry and it is also performing better than its own previous year performance

Weaknesses in the result of the company are as follows-

A. Company does not have a better current ratio because it is lower than the entire industry and it is also on a falling trend which will be representing the company does not have higher current asset on its hands.

B. Companies quick ratio is also not good because company is holding higher inventory and it is visible that it is having lower quick ratio so it is not good for business.

C.The company is also having lower inventory turnover ratio and higher average collection period that is reflecting that the company is not good at management of the inventory and it is also not good at collecting the money from its debtors.

D. Company does not have a better asset turnover ratio and fixed asset turnover ratio because on both the front company is having lower ratio than the entire industry and company is not able to utilise the asset properly and fixed asset properly.

E. Company is not able to maintain a higher return on total asset because it is not able to use the asset efficiently and it is lower than the industry standards.

F. Debt ratio of the company is in line with the overall industry but it has decreased from previous performance because it has taken more level of debt and that would be hurtful for the business.

Bank will not be offering loan to this company because this company does not have a better solvency and this company is not making cash consistently and this company also does not have a better performance in relation of management of its asset because the Asset turnover ratio are lower along with quick ratio and current ratio.