Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $3,510,000 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.

Calculate Times Interest earned Ratio:

Calculate Fixed-payment coverage ratio:

Do you agree or disagree with the statement below?

Because Creek has a much higher degree of indebtedness and much lower ability to service debt than the average firm in the industry, the loan should be rejected.

Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $3,510,000 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. Creek Enterprises Income Statement: Industry averages Debt ratio Times interest earned ratio Fixed-payment coverage ratio 0.43 7.26 2.01 Creek Enterprises Balance Sheet: Creek Enterprises's debt ratio is 0.70 . (Round to two decimal places.) Creek Enterprises's times interest earned ratio is (Round to two decimal places.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Creek Enterprises Income Statement for the Year Ended December 31, 2019 Sales revenue $30,037,000 Less: Cost of goods sold 20,993,000 Gross profits $9,044,000 Less: Operating expenses Selling expense $2,989,000 General and administrative expenses 1,782,000 Lease expense 204,000 Depreciation expense 1,049,000 Total operating expense 6,024,000 Operating profits $3,020,000 Less: Interest expense 1,050,000 Net profits before taxes $1,970,000 Less: Taxes (rate = 21%) 413,700 Net profits after taxes $1,556,300 Less: Preferred stock dividends 85,400 Earnings available for common stockholders $1,470,900 Assets Liabilities and Stockholders' Equity Current assets Current liabilities Cash $1,046,000 Accounts payable $8.037,000 Marketable securities 2,958,000 Notes payable 8,013,000 Accounts receivable 11,953,000 Accruals 458,000 Inventories 7,459,000 Total current liabilities $16.508,000 Total current assets $23,416,000 Long-term debt (includes financial leases)** $18,646,000 Gross fixed assets (at cost)* Stockholders' equity Land and buildings $11,008,000 Preferred stock (24,400 shares, $3.50 dividend) $2,471,000 Machinery and equipment 20,465,000 Common stock (1.13 million Furniture and fixtures 7,991,000 shares at $5.50 par) 6,215,000 Gross fixed assets $39,464,000 Paid-in capital in excess of par value 4.043,000 Less: Accumulated depreciation 12,952,000 Retained earnings 2.045,000 Net fixed assets $26,512,000 Total stockholders' equity $14,774,000 Total liabilities and Total assets $49,928,000 stockholders' equity $49,928,000 *The firm has a 4-year financial lease requiring annual beginning-of-year payments of $204,000. Three years of the lease have yet to run. **Required annual principal payments are $846,000