Question

You are the loan officer at Corner Street Community Bank. You received a loan application from T.P. Jarmon Company. The first picture is for financial statements that belong to the most recent fiscal year(s). The second picture provides financial ratios for the industry. Analyze these financial statements in terms of liquidity, profitability and solvency. Give an opinion on whether you would approve the loan application or not in great detail.

2013 T. P. Jarmon Company, Balance Sheet for 12/31/2012 and 12/31/2013 2012 Cash $ 15,000 Marketable securities 6,000 Accounts receivable 42,000 Inventory 51,000 Prepaid rent 1,200 Total current assets $115,200 Net plant and equipment 286,000 Total assets $401,200 Accounts payable $ 48,000 Notes payable 15,000 Accruals 6,000 Total current liabilities $ 69,000 Long-term debt 160,000 Common stockholders' equity 172,200 Total liabilities and equity $401,200 $ 14,000 6,200 33,000 84,000 1,100 $ 138,300 270,000 $408,300 $ 57,000 13,000 5,000 $ 75,000 150,000 183,300 $408,300 T. P. Jarmon Company, Income Statement for the Year Ended 12/31/2013 Sales (all credit) $600,000 Less cost of goods sold 460,000 Gross profit $140,000 Less operating and interest expenses General and administrative $30,000 Interest 10,000 Depreciation 30,000 Total 70,000 Earnings before taxes $ 70,000 Less taxes 27,100 Net income available to common stockholders $ 42,900 Less cash dividends 31,800 Change in retained earnings $ 11,100

Answer 1

following are the financial ratios for T.P Jarmon company

	2012	2013
current ratio(current assets/current liabilities)	1.67	1.8
acid test ratio (CA-stock / CL)	0.93	0.72
debt ratio (total liabilities/total assets)	0.57	0.55
times interest earned (income from operations/interest expenses)=(140000-60000)=80000/10000		8
operating profit margin(operating profit/sales)=(80000/600000)*100		13%
total assets turnover(sales/total assets)		1.5
fixed assets turnover(sales/fixed assets)		2.22
average collection period(receivable/sales*365)		20
inventory turnover ratio (COGS/average inventory)		6.8
return on equity=(net income/shareholders equity*100)		23.4%
operating return on assets(operating income/assets*100)		19.6%

(note :income from operations = sales - COGS -administration exp.-depreciation)

liquidity position : T.PJarmons liquidity is position is littile low compared to the industry average .even though current ratio have increased from last year , acid-test ratio is littile low in the financial year 2013 compared to 2012 . the company must have suffering from cash shortage problems.

solvency position : debt ratio is high compared to the industry ratios in both years . ratio have become low in 2013 which means the company must have paid off some of its debts and is good at improving its solvency position .times interest earned   is less compared to the industry figure which is not a very good sign as it shows the companys ability on how many times it can pay off its interest charges.

profitability position : operating profit margin is low compared to the industry ratio .but total and fixed assets turnover ratio is high compared to the industry average and shows efficient utilisation of its assets .average collection period is the same as the industry .inventory turnover ratio is low compared to the industry.return on equity is high compared to the industry ratio .operating return on assets also high compared to the industry average ratio.

conclusion: although company's overall profitabiltiy performance is good compared to the industry averages, company's solvency position and its ability to pay of its debt should be given more importance in deciding whether to grant loan or not .it is also important to check whether the company have enough securities to submit for a loan as it already have taken long term debts . based on the given information the company's solvency position is littile high, eventhough it will be a good decision to grant loan to T.P Jarmon as it have some good profitability ratios because of its efficient asset utilisation which is better than the industry averages.