You are a loan officer at Corporate Bank. Penny Wise, manager of Leverage Bhd, is interested in a 5-year loan to expand the entity's operation. The borrowed fund would be used to purchase new equipment. As evidence of Leverage Bhd's debt-worthiness, Penny provided you with the following facts.

2016 2015

Current ratio 3.1:1 2.1:1

Quick ratio 0.8:1 1.4:1

Inventory turnover period 165 days 110 days

Interest cover ratio 13.1 12.1

Operating profit margin 22% 18%

When you told Penny that you would need additional information before making your decision, she was offended. You explained that, as a minimum, you would need complete audited financial statements.

Discuss:

1.Why you would want the financial statements to be audited?

2.Discuss the implications of the above ratios on your lending decision. Are these ratios relevant to the decision?

3.What other ratios that you would want to calculate for Leverage? Why?

4.What are the limitations of ratio analysis?