Question

You are a loan officer for The National Bank. Trish Jones, president of Jones Corporation, has just left your office. She is interested in an 8-year loan to expand the company's operations. The borrowed funds would be used to purchase new equipment. As evidence of the company's debt-worthiness, Trish provided you with "facts".

2019 2018

Current Ratio. 2.75 2.65

Asset Turnover 3.15. 3.14

Profitability Ration 20%. 10%

Earning Per Share 4.50. 4.50

When you told Trish you would need additional information before making your decision, she said, "What more could you possibly want to know?"

• Explain how these ratios are relevant [Note: not all of them are] to the bank's decision
• Discuss the implications of the ratios provided for the lending decision you are to make.
• Evaluate trends in the performance of Jones Corporation based on what you have now.
• List three other ratios you would want to calculate for Jones Corporation, and explain in detail why you would use each.
• Based on your analysis of Jones Corporation, will you recommend approval for the requested loan? Provide specific details to support your decision.

Answer 1

Answer:

Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. A Ratio is a statistical yard stick that provides a measure of the relationship between variables or figures.
Commercial bankers are mostly concerned with the ability of borrowing enterprise to meet its financial obligations timely.
As a result they are mostly interested in ratios like the current ratio , acid test ratio,Asset turnover ratio , profitability ratio etc
Other 3 ratios that can be used here are Debt service coverage ratio , Creditors turn over ratio and Fixed assets ratio
Debt service coverage ratio indicates whether the business is earning the sufficient profits to pay not only the interest charged also whether due to th principal amount
Creditors turnover ratio indicates the speed of with which the payments for credit purchase are made to creditors

Fixed assets turnover ratio extends to the amount contributed by sales to acquire fixed assets
By analysis the given profitability ratios
Current ratio is higher than ideal ratio that is 2. Higher current ratio suggest the inadequate employment of funds
Ideal Fixed assets ratio is 1 . Here it is far above 1 which shows a part of working capital has also been used to acquire fixed assets which may prove quite troublesome for the company
Profitability ratio shows the an increase of 10 % from last year
EPS remains constant
Conclusion : Loan may not be issued since the ratios are unfavourable to the company