Analyse the financial data and ratios from table 1 to 4 and state whether the bank should lend money to this company .

1.analyse the available financial data identifying key strengths and weaknesses in light of the current financial environment;

oconsider levels, trends, benchmarks, underlying data - components of each ratio where relevant, interrelationships between ratios, current economic conditions etc.

2.outline points of concern and make suggestions for business improvement and enhancement of credit quality;

3.provide guidance as what questions FINCORP's management should be asked and what further research is required in order to gain a clearer picture of the business;

4.establish whether, in your opinion, FINCORP should be targeted by the bank, and

5.Based on your analysis and identification of weaknesses, state covenants that should be attached to a loan if the Senior Credit Officer decides to extend funding to FINCORP.

For each of the years provided the following ratios have been calculated for you:

(i)Debt to Equity Ratio

(ii)Interest Coverage

(iii)Return on Equity

(iv)Return on Total Assets

(v)Gross Profit Margin

(vi)Net Profit Margin

(vii)Inventory Turnover Periods

(viii)Average Settlement Period for Debtors

(ix)Average Settlement Period for Creditors

(x)Average Asset Turnover Ratio

(xi)Current Ratio

(xii)Acid Test Ratio

Notes:

(a)For some ratios, calculations are possible for 2 years using the averaging formula, while for others, calculations are made for all 3 years.

(b)The formulas are those supplied in the formula sheet and Reading 2.1.

(c)As a guide to calculations (eg. how to calculate averages), see Reading 2.1

(d)For ROE note that reserves comprise retained profits and other reserves

(e)For ratio (viii) it is assumed that all sales are credit sales

(f)For ratio (ix) it is assume that all purchases are credit purchases

(g)Where units are 'days' eg. Inventory Turnover Periods, periods are rounded up.Hence, 31.2 days becomes 32 days.

(h)FINCORP offers credit terms to debtors : 1 - 14 net 30[1]

(i)FINCORP receives on average 55 day credit terms from creditors.

[1] This means that payment is due within 30 days but debtors will receive a 1 percent discount if they pay within 14 days.

Table 1: FINCORP'S Income Statement and Balance Sheet 2017-19 Income Statement 2017 2018 2019 S'000 5'000 S'000 5'000 5'000 S'00 0 Sales 2300 2000 2490 Less Cost of Sales Opening stock 200 185 195 add Purchases 1000 700 850 less Closing stock -185 1015 -195 890 -190 855 Gross Profit 1285 1310 1835 Less Wages, Salaries & On-costs -480 -430 -450 Heat, Light & Gas -210 -200 -185 Other operating expenses -140 -130 -125 Depreciation -240 -280 -338 Interest -11 -18 -30 -1081 -1056 -1 128 Net profit before tax 204 254 507 Tax -81 -78 -152 Proft after tax 143 178 365 Dividends -95 -105 -105 Retained proft for the year 73 250 Balance Sheet 2017 2018 2019 S'000 S'000 5'000 S'000 S'000 Current Assets Bank 70 70 Marketable Securities 80 90 120 Debtors 150 195 220 Inventory 185 195 190 Total Current Assets 485 550 825 Non-Current Assets 1200 1400 1890 Total Assets 1685 1950 2315 Current Liabilities Bank Overdraf 51 75 34 Creditors 177 184 Accruals 105 126 110 80 Dividends payable 95 105 105 Income taxation 81 78 152 Total Current Liabilities 489 546 461 Non-current liabilities Bank loan 1 20 175 330 Total Liabilities 609 721 791 Shareholder's equity Paid-up capital ($1/share) 740 820 865 Retained profits 178 251 501 Other Reserves 158 158 158 Total Equity 1076 229 1524 Total Claims 1685 1950 2315Table 2: FINCORP's Financial Ratios 2017-19 2017 2018 2019 Debt to equity Total liabilities x 100 809 x 100 721 x 100 791 x 100 Ordinary share capital and reserves 1078 225 1524 56.60% 58.67% 51.90% Interest Coverage Net profit before interest and taxation x 100 (204 +11) x 100 (254 + 16) x 100 (507 + 30) x 100 Interest expense 18 30 19.5 times 16.9 times 17.9 times Return on equity Net profit after tax and preference dividends x 100 178 x 100 355 x 100 Average ordinary share capital and reserves (1078 + 1229) / 2 (1229 + 1524) / 2 15.44% 25.79% Return on total assets Net profit before interest and taxation x 100 (254 + 16) x 100 (507 + 30) x 100 Average total assets (1685 + 1950) / 2 (1950 + 2315) / 2 14.86% 25.18% Gross profit margin Gross profit x 100 1285 x 100 1310 x 100 1835 x 100 Sales 2300 2000 2490 55.87% 65.50% 65.66% Net profit margin Net profit before interest and taxation x 100 (204 +11) x 100 (254 + 16) x 100 507 + 30) x 100 Sales 2300 2000 2490 9.35% 13.50% 21.57% Average inventory turnover period Average inventory held x 365 (200 + 185)/2 (185+ 195)/2 x 385 (195 + 190)/2 x 385 Cost of sales 1015 890 855 69.2 days 100.5 days 82.2 days or 70 days or 101 days or 83 days Average settlement period for debtors Average trade debtors x 365 (150 + 195)/2 x 385 (195 + 220V2 x 385 Credit sales 2000 1490 31.5 days 30.4 days or 32 days or 31 days Average settlement period for creditors Average trade deditors x 385 (177 + 184)/2 x 385 Credit purchases 700 (164 + 1 10/2 x 385 850 88.9 days 58.8 days or 89 days or 59 days Asset turnover ratio Sales 2000 2490 Average total assets employed (1685 + 1950) / 2 (1950 + 2315) / 2 1.10 times 1.17 times Current ratio Current assets 485 550 489 825 Current liabilities 546 481 0.99 times 1.01 times 1.36 times or 0.99 : 1 or 1.01 : 1 or 1.36 : 1 Acid test ratio Current assets (excluding inventory & prepayments) (485 - 185) (550 - 195) (625 - 190) Current liabilities 489 546 461 0.61 times 0.65 times 0.94 times or 0.61 : 1 or 0.65 : 1 or 0.94 : 1Table 3: Average ratio values for peer firms over 2017-19 Item Peer Average Debt to Equity 45% Interest Coverage 19 times ROE 18.00% ROA 23% Gross profit margin 58% Net profit margin 17% Inventory turnover period 75 days Settlement period for debtors 28 days Settlement period for creditors 55 days Asset Turnover 1.23 times Current ratio 1.6 times Quick ratio 1.0 timesTable 4 Altman Z score calculations 2017 2018 2019 X, = Working Capital (485 - 489) (550 - 546) (625 - 461) Total Assets 1685 1950 2315 -0.00237 0.00205 0.07084 X, = Retained Profit 178 251 501 Total Assets 1685 1950 2315 0.10564 0.12872 0.21641 X= EBIT (204 + 11) (254 + 16) (507 + 30) Total Assets 1685 1950 2315 0.12760 0.13846 0.23197 Market Value of Equity (740*1.21) (820*1.17) (865*1.23) Book Value of Total Liabilities 609 721 791 1.47028 1.33065 1.34507 X5 = Sales 2300 2000 2490 Total Assets 1685 1950 2315 1.36499 1.02564 1.07559 X1 x 1.2 0.00285 0.00246 0.08501 X2 x 1.4 0. 14789 0. 18021 0.30298 Xg x3.3 0. 42107 0. 45692 0.76549 X4 x 0.6 0.88217 0.79839 0.80704 X5 x 10 1.36499 1.02564 1.07559 Altman's Z score 2.81327 2.46362 3.03611