Ms. Smith, owner of Smith Dental Supply Company, and has been in business for one year. She applied for a $150,000 loan from her bank of which $100,000 is to purchase new equipment for the warehouse. Ms. Smith thinks better equipment will allow her to fulfill her customers orders faster.  The bank requested financial statements for her shop as a basis for considering her loan request. One measure the loan officer will use in assessing the viability of Ms. Smith's loan request will be to compute the Fixed Asset Turnover ratio.  Ms. Smith is confused by this ratio and how it relates to her request for a loan.  She asks her accountant to explain why the loan officer will use this as one measure to ascertain if she qualifies for the $150,000 loan if she has a solid balance sheet.

Discuss this ratio and why it is important (or not) in reviewing Ms. Smith's loan request. Without getting into the dollar amount details a few things to remember:

She has been in business a year.

Sales are lagging behind her projections.

Cost of goods seem to be higher than she thinks they should be.

She questions why there is depreciation expense which is lowering her net income.

Also, determine if she is accurate in her claim that the balance sheet should be enough.  What else on the balance sheet can be of concern?