Question

What aspects of a business firm's financial statements do loan officers and credit analysts examine carefully? Support your answer with relevant example drawn from the industry, or research literature from academia.(Your answer for each question should be between 500 to 700 words)

Answer 1

Ans.

Loan officers and credit analysts examine the following aspects of a business firms's financial statements:

a)Control over expenses? Key ratios here include cost of goods sold /net sales:selling ,administrative and other expenses/net sales:wages and salaries /net sales interest expenses on borrowed funds/net sales: over head expences/Net sales: Depreciation expences /Net sales and taxes /Netsales

b)Operating efficiency? Important ratios here are net sales /Total assets,Annual cost of goods sold divided by average inventory levels, net sales/ net fixed assets and net sales/ accounts and notes recievable .

c)Marketability of a product ,Service , or skill? Key ratio measures in this area are the gross profit margin ,or netsales less cost of goods sold to net sales, and the net profit margin,or net income after taxes to net sales

d)coverage? Important measures here include interest coverage (such a income before interest and taxes divided by total interest payments),coverage of interest and principle payment ( such a earnings before interest and taxes divided by annual interest payments plus principle payments adjusted for the tex effect),and the coverage of all fixed payments(such as income before interest, taxes and lease payments divided by interest payments plus lease payments).

e)Profitability indicators ?Key barrometers in this area can include such ratios as before tax net income divided by total assets, net worth,or sales ,and after-tax net income divided by total assets(or ROA )net worth (or ROE)or profit margin

f)Liquidity indicators? Imprtant ratio measures here usually incude the current ratio (current assets divided by current liabilities),and the acid -test ratio (current assets less inventoried divided by corrent liabilities)

g)Leverage indicators? Ratios indicating trends in the dimension of business performance usually include the leverage ratio (total liabilities/ total assets or net worth) ,the capitalization ratio (of long -term debt divided by total long -tem liabilitied and net worth) , and the debt -to- sales ratio (of total liabilities divided by netsales)

One problem with employing ratio measures of business performance is that they only reflect symptoms of a possible problem but usually dont tell us the nature of the problem or its causes .Mangement must look much more deeply into the reasons behind ant apparent trend in a rtatio . Moreover ,anytime the value of a ratio changes the change could be due to a shift in the numerator of the ratio ,In the denominator , or Both.