Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $3,560,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages and Creek's recent financial statements, evaluate and recommend appropriate action on the loan request. Industry averages Creek Enterprises Income Statement: B Debt ratio Times interest earned ratio Fixed-payment coverage ratio 0.48 7.12 2.03 Creek Enterprises Balance Sheet: 5: Creek Enterprises's debt ratio is .72. (Round to two decimal places.) Creek Enterprises's times interest earned ratio is 2.80 . (Round to two decimal places.) Creek Enterprises's fixed-payment coverage ratio is : (Round to two decimal places.) $29,964,000 21,010,000 $8,954,000 $3,038,000 1,778,000 231,000 1,013,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 21%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders 6,060,000 $2,894,000 1,034,000 $1,860,000 390,600 $1,469,400 94,125 $1,375,275 Creek Enterprises Balance Sheet December 31, 2019 Assets Liabilities and Stockholders' Equity Current assets Current liabilities Cash $1,016,000 Accounts payable $7,990,000 Marketable securities 2,978,000 Notes payable 7,950,000 Accounts receivable 12,040,000 Accruals 462,000 Inventories 7,458,000 Total current liabilities $16,402,000 Total current assets $23,492,000 Long-term debt (includes financial leases)** $19,472,000 Gross fixed assets (at cost)* Stockholders' equity Land and buildings $10,997,000 Preferred stock (25,100 shares, $3.75 dividend) $2,464,000 Machinery and equipment 20,547,000 Common stock (1.02 million Furniture and fixtures 7,965,000 shares at $5.50 par) 5,610,000 Gross fixed assets $39,509,000 Paid-in capital in excess of par value 4,050,000 Machinery and equipment 20,547,000 Common stock (1.02 million Furniture and fixtures 7,965,000 shares at $5.50 par) 5,610,000 Gross fixed assets $39,509,000 Paid-in capital in excess of par value 4,050,000 Less: Accumulated depreciation 12,988,000 Retained earnings 2,015,000 Net fixed assets $26,521,000 Total stockholders' equity $14,139,000 Total liabilities and Total assets $50,013,000 stockholders' equity $50,013,000 *The firm has a 4-year financial lease requiring annual beginning-of-year payments of $231,000. Three years of the lease have yet to run. **Required annual principal payments are $754,000
