Question

4) If you were the bank loan officer would you recommend renewing the loan or demand its repayment? Would your actions be influenced if, in early Year 2, Computron (the company) showed you its projection plus proof that it was going to raise over $1.2 million of new equity capital?

PS: Year 2 data is estimation.

	Year 2	Year 1	Year 0	Industry
Current Ratio	1,86x	1,1x	2,3x	2,7x
Quick Ratio	0,67x	0,4x	0,8x	1,0x
Inventory turnover	4,10x	4,5x	4,8x	6,1x
DSO	44,9	39	36,8	32
Fixed asset turnover	8,61	6.2x	10.0x	7.0x
Total asset turnover	2,01	2.0x	2.3x	2.5x
Debt ratio	55,61%	95,40%	54,80%	40,00%
TIE	6,3x	-3.9x	3,3x	6,2x
EBITDA coverage	5,5x	-2,5x	2,6x	8,0x
Profit margin	3,60%	-8,9%	2,60%	3,60%
Basic earning power	14,40%	-24,1%	14,20%	17,80%
ROA	7,25%	-18.1%	6,00%	9,00%
ROE	16,34%	-391,4%	13,30%	18,00%
Price/Earnings	12,01x	-0,4%	9,7x	14,2x
Price/Cash Flow	8,2x	0,6x	8,0x	7,6x
Market / Book	1,96x	1,7x	1,3x	2,9x
Book value per share	$6,21	$1,33	$6,64	N/A

Answer 1

Answer-

By analyzing the year 1 financials we can see that the company has a Current ratio is 1.1 x which shows that the company is just able to meet its short term obligations and liquidity needs, however the deteriorating debt ratio which stands at 0.95 which is not desirable at all if we take into consideration the industry standards.

The TIE = EBIT / Interest expense, which shows the company's ability to service the interest expense of debt is negative in year 1 which shows that the deteriorating condition of the company.

The other ratios like Profit margin, ROA and ROE are all negative and shows that it will make it difficult for the company to be in going concern business.

As a bank loan officer it is recommended to demand its repayment rather than renewal of loan as the company will find it difficult in the long run to be in business. The company may default its loans and interest payments and it's better to demand repayment or else it will be difficult to recover the loans

The projections for year 2 and the proof shown by the company that it is going to raise over $1.2 million of new equity capital may not alter the decision as the projections that are shown for year 2 are not convincing and seems to be very optimistic projections and moreover its difficult to project the change in uncertain environment.

The equity that the company will be raising will have a high interest rate given the deteriorating debt situation and the company may not be able to turn around the situation as there will be lot of pressure from both equity and debt holders which will hamper the decision making of the company.

The other aspect is the purpose of equity that the company is raising, whether it is used to meet the Capex or to pay off some debt or to streamline the operations of the company. It will be difficult for the company to justify the projections that it has made for the year 2 as they are highly optimistic and seems to be anticipating an economic boom that supports the prospects of company.

Hence the decision as a bank loan officer is to demand the repayment of loan and not alter the decision even if looking at the estimated year 2 projections and  proof of equity raising of $ 1.2 million.