Question 1: Analyzing Financial Performance Using Ratio Analysis – Manufacturers Bank is evaluating Aluminum Industries, Inc., which has requested a $3 million loan, to assess the firm’s financial leverage and risk. On the basis of the debt ratios for Aluminum, along with the industry averages and Aluminum’s recent financial statements (which follow), evaluate and recommend appropriate action on the loan request.
Aluminum Industries, Inc. Income Statement for the
Year Ended December 31, 2009
Sales revenue $30,000,000
Less: Cost of goods sold 21,000,000
Gross profit $ 9,000,000
Less: Operating expenses
Selling expense $3,000,000
General and administrative expenses 1,800,000
Lease expense 200,000
Depreciation expense 1,000,000
Total operating expense 6,000,000
Operating profit $3,000,000
Less: Interest expense 1,000,000
Net profit before taxes $2,000,000
Less: Taxes (rate = 40%) 800,000
Net profits after taxes $1,200,000
Aluminum Industries, Inc. Income Statement for the
Year Ended December 31, 2009
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Assets
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Liabilities and Stockholders Equity
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|
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Current assets
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Current liabilities
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|
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Cash
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$1,000,000
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Accounts payable
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$8,000,000
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Marketable securities
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3,000,000
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Notes payable
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8,000,000
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Accounts receivable
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12,000,000
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Accurals
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500,000
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Inventories
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7,500,000
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Total current liabilities
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$16,500,000
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Total current assets
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$23,5000,000
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Long-term debt (including financial leases)
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$20,000,000
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Gross fixed assets (at cost)
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Stockholders' equity
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Land and buildings
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$11,000,000
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Preferred stock (25,000 shares, $4 dividend)
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$2,500,000
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Machinery and equipment
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20,500,000
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Common stock (1 million shares, $5 par)
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5,000,000
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Furniture and fixtures
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8,000,000
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Paid-in capital in excess of par
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4,000,000
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Gross fixed assets
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$39,500,000
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Retained earnings
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2,000,000
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Less: Accumulated depreciation
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13,000,000
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Total stockholders' equity
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$13,500,000
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Net fixed assets
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$26,500,000
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Total liabilities and stockholders equity
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$50,000,000
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Total assets
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$50,000,000
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|
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Industry Averages:
Debt ratio 0.51
Debt-equity ratio 1.07
Times interest earned ratio 7.3