You are the Vice President of Corporate Credit Department at CIMB Bank. Your main responsibility is to review applications for loans. You are at present reviewing a short term loan application of RM8 million by the Lion Tools Corporation (LTC). LTC manufactures various types of high quality punching and deep-drawing press tools for kitchen appliance manufacturers.

CASE CONTEXT

LTC has been into the market for 2 years and has recently gone through the initial public offering (IPO) process and has become a public company. LTC has an annual sale of RM45 million in year 2016. LTC makes unique tools for kitchen appliances. For the past 2 years LTC has spent so much on the R&D.

LTC's 2-years performance revealed challenges in terms of Account Receivables collection. Within this 2-year period, LTC availed loans from HLBB and Agro Bank. Though Mr Fauzie Fau has proven himself to be very likeable and persistent person, the company's 2-year performance poses a challenge for him and for LTC to avail the RM8M from CIMB.

You as the VP of the Credit and Corporate Loan is in dilemma now on whether to approve the LTC's request for the short term loan given the information he got from asking the other 2 banks who handled LTC's loan. LTC has a goodworking relationship with the other two banks. Both Banks have praises for thecompany and its determined manager. However, unwilling to increase LTC's borrowing limit based on their average leveraged position.

LTC had experienced extraordinary growth, fueled by heavy spending on research and development and a rapid expansion of its sales force. Its technical staff was very well regarded at developing new products with a wide range of applications. The combination of state-of-the-art products and a rapidly expanding market resulted in sales growth of 10% per year. Mr. Fauzie believed that industry sales would continue to grow at this rate and that any failure to maintain LTC's market position would be damaging in terms of competitive position and internal morale.

Sales volume, which had grown continuously from the start, was always large in relation to the available capital. The situation was exacerbated by large operating losses as LTC entered new markets aggressively. Management met the financing pressures by heavy reliance on short-term credit

With the two-year financial statements, you will have to assess the viability of approving LTC's loan request.

The case will be analyzed using your perspective. Also, it will be assumed that LTC is a start-up company and this is the main reason why LTC relied heavily on short term loans to finance their initiatives for growth

Mr Fauzie Fau, the financial manager of LTC, has submitted a justification to support the application for a short-term loan from CIMB for a 8M loan. Extracts of the Statement of Comprehensive Income and Statement of Financial Position of LTC, submitted with the justification to BBB, are provided below:

Mr. Fauzie Fau was perfectly willing to pledge the company's accounts receivable, inventory or anything else that the bank thought would be desirable security as long as the arrangement was fair to the company and specific enough so that he could count on having the funds available when he needed them. You explained that the bank was always interested in sound loan proposals from companies that showed the promise of developing into good accounts. You promised to study the request and said that you hoped to visit the company in the near future.

Mr. Fauzie Fau also pointed out that LTC was a familiar name to two other major banks and suggested you to consider seeking the insights of the loan officers involved. Summaries of their comments are provided as below :

Bank of HLBB (Asset Based Lending Division):

"Fauzie Fau is a very likeable, magnetic person who puts you through challenging but enjoyable mental gymnastics during negotiations. He is also a grinder who comes back once a week with a new request. He never lets up when he wants something; just keeps coming at you and grinding away. The CEO, Pak Wan also tries to get to the highest possible authority, even on mundane issues. He left HLBB because of our unwillingness to add to LTC's highly leveraged position. We simply didn't believe that the quality of the assets warranted higher lending limits."

AGRO Bank (Technology Lending Group): "Pak Wan is extremely honest and made LTC an open book. The bankers were invited to the strategic planning meetings and were kept informed of developments at the company. Pak Wan is well trained, with an MBA from City University, and is a tough, effective CEO. He is a doer and a shaker."

Statement of Financial Position of Lion Tools Corporation

as at 31 December 2016 /2015

2016 ('000)

2015 ('000)

ASSETS

Non-current assets

Land

1 000

1 000

Plant and equipment

31 000

26000

Dep

(13000)

(10000)

Current assets

Cash and cash equivalents

1 800

2 000

Trade receivables

7 600

6 000

Inventories

5 220

5 000

TOTAL ASSETS

33 620

30 000

EQUITY AND LIABILITIES

ordinary share

4 000

4 000

Retained earnings

6 620

4 000

Non-current liabilities

Debentures

4 000

4 000

Current liabilities

Trade payables

15 600

15 000

Accrued expenses

3 400

3 000

TOTAL LIABILITIES AND EQUITES

33620

33000

Extract of the Statement of Comprehensive Income of Lion Tools Corporation for the year ended 31 December 2016

2016 ('000)

2015('000)

Revenue (all credit)

45 000

40 909

Cost of sales

(23 000)

(20 909)

Gross profit

22 000

20 000

Selling and admin expenses

(13 000)

(11 818)

Other expenses (depreciation)

(3 000)

(2 000)

Finance costs

(412)

(400)

Profit before tax

5 588

5 782

Income tax expense

(2 235)

(2 313)

Profit for the year

3 353

3 469

**ordinary dividend

733 000

758 000

You have obtained the following industry averages:

Gross profit margin

50%

Operating profit margin

15%

Net profit margin

8%

Return on assets

10%

Return on equity

20%

Current ratio

1.5

Quick ratio

1.0

Debt Ratio

0.5

Time interest earned

25

Days Receivables

45

Inventory Turnover

8

Asset Turnover

1.6

REQUIRED

Need MEMORANDUM to submit to your boss, as to whether finance should be granted to Lion Tools Corporation.

Use the format (tables) that follow in order to complete the ratio analysis portion of the memorandum.

Provide comments and evaluations under the respective topics provided.

You may assume 365 days in a given year and you are not required to use averages.

Assume credit purchases are equal to cost of sales.

Show all your workings and round to 2 decimal points