Background Information

You work for a bank that wants to grow its small/medium business loans portfolio.It is screening businesses in the region and will market selected businesses by encouraging them to refinance their business loans. You have been asked to provide a first-phase assessment of the viability of a small-machinery manufacturer called FINCORP, that is currently in a growth phase, expanding capacity. It wants to borrow $250,000 for the purchase of new equipment. Your job is to:

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.

In constructing your assessment, use the following headings:

1.Introduction

FINCORP

2.Analysis of financial data

3.Questions for management and further research required

4.Suggestions for business improvement and enhancement of credit quality

5.Summary and Decision¹

6.Recommended covenants

7.References²

¹There is no 'right answer'. The emphasis is on presenting a coherent and defendable viewpoint.

² I am not concerned which style you use - just be consistent

Financial Data

Use the data in Tables 1 to 4 to conduct your financial analysis.

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]

FINCORP receives on average 55 day credit terms from

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