Question

Carlos Santana is the accountant and manager of the companies Mrate Distribuidora. He hires him as a financial analyst and advisor in the application for a loan. The company is requesting a five-year loan at a well-known bank in the community. The purpose of the loan is to cancel the payment - "notes to pay" of 2012 and to finance current projects, especially the inventory of merchandise. The following financial statements are presented below.

INCOME STATEMENTS:                                                      2012                           2011

SALES                                                                                  $16,665,000                $ 15,053,750

COST OF GOODS SOLD                                                    9,270,000                     7,987,000 GROSS PROFIT                                                                      $ 7,395,000                  $ 7,066,750

OPERATING EXPENSES:

            FIXED CASH OPERATING EXPENSES              $   1,925,000                $ 1,725,000

            VARIABLE OPERATING EXPENSES                       1,840,000                   1,788,000

            DEPRECIATION                                                             480,000                       380,000                 TOTAL OPERATING EXPENSES                         $ 4,245,000                 $ 3,893,000

EARNINGS BEFORE INTEREST & TAXES                     $ 3,150,000                 $ 3,173,750

INTEREST                                                                                1,332,500                    1,315,000

EARNINGS BEFORE TAXES                                             $ 1,817,500                 $ 1,858,750

TAXES                                                                                         727,000                       743,500 NET INCOME                                                             $ 1,090,500                 $ 1,115,250

LESS PREFERRED STOCKS DIVIDENDS                             247,500                       278,125

EARNINGS AVAILABLE FOR COMMON STOCKHOLDER $     843,000                $   837,125   

                                                                                                ==========             ==========

BALANCE SHEETS:

                        ASSETS                                                 2012                            2011

CASH                                                                          $ 512,500                  $ 410,250       

ACCOUNTS RECEIVABLE                                          2,313,890                  2,209,750

MARKETABLE SECURITIES                                         762,500                      800,000

INVENTORIES                                                             1,989,062                  1,958,612

            TOTAL CURRENT ASSETS                         $ 5,577,952            $ 5,378,612  

LAND                                                                         $ 6,934,547             $   6,729,267

BUILDING & EQUIPMENT                                     3,500,000                  3,500,000

LESS: ALLOWANCE FOR DEPRECIATION            1,250,000                  1,150,000

            TOTAL FIXED ASSETS (NET)                    $ 9,184,547               $ 9,079,267

TOTAL ASSETS                                                       $14,762,499              $14,457,879

                                                                                 ========            =========

  LIABILITIES

ACCOUNTS PAYABLE                                            $ 2,875,000                   $ 2,621,250

NOTES PAYABLE                                                      1,427,500                      1,275,000

MORTGAGE - CURRENT PORTION                           187,500                         252,255

            TOTAL CURRENT LIABILITIES                $ 4,490,000                   $ 4,148,505

MORTGAGE DEBT- LONG TERM                         $ 3,913,125                   $ 4,793,000

            TOTAL LIABILITIES                                   $ 8,403,125                   $ 8,941,505

            STOCKHOLDERS’ EQUITY

COMMON STOCKS                                               $   2,100,000                  $2,100,000

PAID IN CAPITAL                                                        966,374                       966,374

RETAINED EARNINGS                                                3,293,000                    2,450,000     

            TOTAL STOCKHOLDERS’ EQUITY         $   6,359,374             $   5,516,374

TOTAL LIAB. & STOCKHOLDERS’ EQUITY     $ 14,762,499              $   14,457,879

                                                                               ===========           ===========

INDUSTRIES RATIOS:                                              INDUSTRIES AVERAGE

CURRENT RATIO                                                                  1.50

ACID TEST RATIO                                                                1.20

AVERAGE COLLECTION PERIOD                                      30 DAYS

INVENTORY TURN/OVER                                                    10.20 TIMES

DEBTS TO TOTAL ASSETS                                                  24.50%

LONG TERM DEBTS TO TOTAL CAPITALIZATION         33%

TIMES INTEREST EARNED                                                  2.50 TIME

GROSS PROFIT MARGIN                                                     26%

OPERATING PROFIT MARGIN                                            17%

NET PROFIT MARGIN                                                          7.50%

TOTAL ASSETS TURN/OVER                                               2.14 TIMES

FIXED ASSETS TURN/OVER                                    1.40 TIMES

OPERATING EARNINGS RETURN ON INVESTMENT       11.4%

RETURN ON TOTAL ASSETS                                               4.00%

RETURN ON COMMON EQUITY                                        9.50%

REQUERIDO:

1. RATIO ANALYSIS:                                                                                                          EXCELLENCE, GOOD, AVERAGE, POOR, and DEFICIENT (personal appraisal)

           

2. COMMON SIZE ANALYSIS

                        A. INCOME STATEMENTS

                        B. BALANCE SHEETS

           

3. FUND STATEMENT ANALYSIS

           

4. ANALYZE THE LOAN REQUEST. WOULD YOU GRANT THE LOAN?     EXPLAIN.

Answer 1

1.

Ratio Analysis
Particulars	Formulae	Calculation	Ratio or Margin	Industry Average	Rating
Current Ratio	Current Assets/Current Liabilities	$ 5,577,952/4,490,000	1.24	1.5	Average
Acid Test Ratio	Liquid Assets/Current Liabilities	$3,588,890/ 4,490,000	0.80	1.2	Average
Average Collection period	Average Receivables x Months or days in a year / Net Credit Sales for the year	($2,261,820*365 days)/ $ 16,665,000	49.54	30 days	Average
Inventory Turnover	Cost of Goods sold/ Average Inventory	$ 9,270,000/ 1,973,837	4.70	10.2	Average
Debts to Total Assets	(Short Term debt+Long term debt)/Total Asset	$8,403,125/ 14,762,499	57%	24.50%	Excellence
Long Term Debts to Total Capitalisation	Long term debt / (Long term debt + Preferred Stock + Common Stock)	$ 3,913,125/(3,913,125+6,359,374)	38%	33%	Excellence
Times Interest Earned	EBIT/ Interest Charges	$ 3,150,000/ 1,332,500	2.36	2.5	Good
Gross Profit margin	Gross Profit/Net Sales X 100	$ 7,395,000/16,665,000	44.37%	26%	Excellence
Operating Profit margin	Operating Profit/Net Sales X 100	$ 3,150,000/ 16,665,000	18.90%	17%	Excellence
Net Profit margin	Net Profit/Net Sales X 100	$ 1,090,500/16,665,000	6.54%	7.50%	Good
Total Assets Turnover	Cost of goods Sold / Total Assets	$ 9,270,000/ 14,762,499	0.63	2.14	Poor
Fixed Assets Turnover	Cost of goods Sold / Total Fixed Assets	$ 9,270,000/ 9,184,547	1.01	1.4	Average
Operating earnings return on Investment	operating income / total operating assets	$ 3,150,000/ 13,999,999	22.50%	11.40%	Excellence
Return on Total Assets	EBIT/ Total Net assets	$ 3,150,000/ 14,762,499	21.34%	4%	Excellence
Return on Common Equity	Net Profit after Taxes/ Common Equity X 100	$ 1,090,500/ 2,100,000	52%	9.50%	Excellence

Note

Liquid Assets	Current Assets - Inventory
	$ 5,577,952 - $ 1,989,062
	$3,588,890
Average Receivables	$ (2313890+2209750)/2
	$2,261,820
Net Credit Sales for the year	Assumed all sales are on credit basis
Average Inventory	(1,989,062+1,958,612)/2
	$ 1,973,837
total operating assets	total assets - marketable securities
	$14,762,499 - $762,500
	$ 13,999,999

2.

Common Size Analysis
Income Statements of Mrate Distribuidora.
Particulars	2012		2011
	Amount	Percent	Amount	Percent
Sales	1,66,65,000	100%	1,50,53,750	100%
Cost of Goods sold	92,70,000	56%	79,87,000	53%
Profit	73,95,000	44%	70,66,750	47%
Operating Expenses
Fixed operating expenses	19,25,000	12%	17,25,000	11%
Variable operating expenses	18,40,000	11%	17,88,000	12%
Depreciation	4,80,000	3%	3,80,000	3%
EBIT	31,50,000	19%	31,73,750	21%
Interest	13,32,500	8%	13,15,000	9%
EBT	18,17,500	11%	18,58,750	12%
Taxes	7,27,000	4%	7,43,500	5%
Income	10,90,500	7%	11,15,250	7%

Common Size Analysis
Balance Sheet of Mrate Distribuidora.
Particulars	2012		2011
	Amount	Percent	Amount	Percent
Assets
Cash	5,12,500	3.47%	4,10,250	2.84%
Accounts Receivable	23,13,890	15.67%	22,09,750	15.28%
Marketable Securities	7,62,500	5.17%	8,00,000	5.53%
Inventories	19,89,062	13.47%	19,58,612	13.55%
Total Current Assets	55,77,952	37.78%	53,78,612	37.20%
Land	69,34,547	46.97%	67,29,267	46.54%
Building & Equipment less Depreciation	22,50,000	15.24%	23,50,000	16.25%
Total Fixed Assets	91,84,547	62.22%	90,79,267	62.80%
Total Assets	1,47,62,499	100%	1,44,57,879	100%
Liabilities
Accounts Payable	28,75,000	19.48%	26,21,250	18.13%
Notes Payable	14,27,500	9.67%	12,75,000	8.82%
Mortgage	1,87,500	1.27%	2,52,255	1.74%
Total Current Liabilities	44,90,000	30.41%	41,48,505	28.69%
Mortgage - Long Term	39,13,125	26.51%	47,93,000	33.15%
Total Liabilities	84,03,125	56.92%	89,41,505	61.85%
Stock Holders Equity
Common Stocks	21,00,000	14.23%	21,00,000	14.52%
Paid in Capital	9,66,374	6.55%	9,66,374	6.68%
Retained Earnings	32,93,000	22.31%	24,50,000	16.95%
Total Stock Holders Equity	63,59,374	43.08%	55,16,374	38.15%
Total Liabilities & Stock Holders Equity	1,47,62,499	100%	1,44,57,879	100%

3.

Funds from operations
Mrate Distribuidora.
Particulars	Amount
Net Income	10,90,500
Add:
Depreciation	4,80,000
Tax Provosion	7,27,000
	22,97,500

Changes in Working Capital
Mrate Distribuidora.
Particulars	2012	2011	Changes
	Amount	Amount
Assets
Cash	5,12,500	4,10,250	-1,02,250
Accounts Receivable	23,13,890	22,09,750	-1,04,140
Marketable Securities	7,62,500	8,00,000	37,500
Inventories	19,89,062	19,58,612	-30,450
Total Current Assets	55,77,952	53,78,612	-1,99,340
Liabilities
Accounts Payable	28,75,000	26,21,250	-2,53,750
Notes Payable	14,27,500	12,75,000	-1,52,500
Mortgage	1,87,500	2,52,255	64,755
	44,90,000	41,48,505	-3,41,495
Working Capital	10,87,952	12,30,107	1,42,155

4.

Based on current ratio the company may not have adequate funds to pay the current dues but solvency postion is good so the Loan can be granted against proper security