Question

ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One-third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements.

ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows:

Year	2017	2018	2019
Overdraft ($'000)	50	567	1,167
Trade Creditors ($'000)	400	733	1,133
Interest	?	?	?

The Industry averages for firms similar to ARG Inc are

Net Profit Margin	9%		Creditors days	70 days
Interest Cover	15 Times		Current ratio	21 times
Stock days	85 days		Quick ratio	0.8 times
Debtor days	75 days		DEBT/Equity ratio	40% (using Book value)

Required: As the newly-appointed Chief Financial Officer of ARG Inc. write a report of no more than three pages 1.5 line spaces to the board which discusses whether the company is likely to be successful if it approaches its bank FCIB for a loan to undertake a project at a cost of $2.5 million.  Your discussion should include an analysis of the current financial position and recent financial performance of the company. The report should comment on whether the bank should provide ARG Inc. with the finance and on what basis. Annual Interest should be clearly calculated as part of the leverage analysis.

	ARG INC INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31
	2019	2018	2017
	($'000)	($'000)	($'000)
Revenue	5,200	3400	2600
Cost of Goods sold	4570	2806	2104
Profit before interest & tax	630	594	496
Interest	70	34	3
Earnings before tax	560	560	493
Tax	140	140	123
Net Income	420	420	370
Dividends	20	20	20
Retained profit	400	400	350

ARG Inc Balance Sheet as at December 31
		2019 ($’000)	2018 ($’000)	2017 ($’000)
Fixed Assets Currents Assets Inventory                       Accounts Receivable		1,600	1,200	800
		1450                               1000                             600 1,400                                 850                            400 2,850                                 1,850                      1,000
Total Assets		4,450	3,050	1,800
Current Liabilities		2,300	1,300	450
Ordinary shares		1,000	1,000	1,000
Reserves		1,150	750	350
Total Liabilities & Owners Equity		4,450	3,050	1,800

Answer 1

Yes, ARG inc. should approach it's Bank FCIB for a loan to Undertake a Project at a Cost of $2.5 Million.

Basis of Providing Loan by Bank :

1. Good Interest Coverage Ratio, which is 9 Times last Year

2. Good Quick Ratio (1:1), whereas ARG Inc. have 1.08:1 last Year

3. Net Profit Margin Ratio, Which is 8.65%