Following info given regarding a firm that wants a bank loan. Analyza the firms
ID: 2635597 • Letter: F
Question
Following info given regarding a firm that wants a bank loan. Analyza the firms performance based on the information given below and determine if they should be given the loan
Should they be given the loan and why
Ratio Local Firm Industry average Current Ratio 1.84 1.80 Acid Test 0.72 0.90 Debt Ratio 0.60 0.50 Times interest earned ratio 7.50 10.00 average collection period 21.08 20.00 inventory turnover 5.48 7.00 return on common equity 0.25 0.12 gross profit margin 0.21 0.25 operating roi 0.20 0.17 operating profit margin 0.12 0.14 total asset turnover 1.47 1.20 fixed asset turnover 2.22 1.80Explanation / Answer
Here, the current ratio is more than 1 which indicates that the company is good in paying its short-term liabilities. Acid test ratio or the quick ratio is less than 1 because the company is facing difficulty in collecting the receivables.
TIE ratio provides the information related to the debt paying ability. If the company has high TIE ratio, then the company is good in paying its debt or the interest payments.
The compnay can take the loan from the above analysis because it has good debt paying capacity and able to clear short-term obligations.
On the other hand, the company cannot take high amount of loan because the company already contains 60% debt of the total capital structure. Taking loan will increase the amount the debt of the firm which is not good if the company is unable to pay the debt obligations.