Professional Documents
Culture Documents
Cost of sales/Sales
Gross profit/Sales
Labor costs (wages, salaries, and fringe benefits)/Sales
Selling, administrative, and other expenses/Sales
Depreciation expenses/Sales
Other operating expenses/Sales
Net operating profit/Sales
Interest expense on borrowed funds/Sales
Net income before taxes/Sales
Income taxes/Sales
Net income after taxes/Sales
Example
Black Gold’s net income after taxes and net income as a percentage of total net
sales has been negative in two of the last four years. Its sales revenues have been
essentially flat over the past four years, while the cost of goods sold, both in dollar
terms and relative to net sales, has risen significantly over the past four years.
Moreover, if this loan is to be secured by accounts receivable and inventory, the
loan officer clearly has reason to be concerned, because the dollar amount and
percentage of total assets of both of these balance sheet items have risen sharply.
And the firm’s short-term (current) liabilities have risen as well.
17.7
Financial Ratio Analysis of a Customer’s
Financial Statements
A borrowing customer’s
How well the business firm protects and grows its earnings
Wages and Salaries/Net Sales
Taxes/Net Sales
Expense Control Ratios for Black Gold Inc.
Operating
Fixed Asset Turnover ratio= Net sales/Net fixed assets
Efficiency
Ratios Accounts Receivables Turnover ratio= Net sales/Accounts & notes receivables
3 Years
Most Recent Year 1 Year Ago 2 Years Ago Ago
Inventory Turnover ratio 3.46 times 3.56 times 4.41 times 6.09 times
Average collection period 93.4 days 88.8 days 79.7 days 47.6 days
Fixed Asset Turnover ratio 3.44 times 2.73 times 2.07 times 1.79 times
Total Asset Turnover ratio 1.14 times 1.03 times 0.93 times 0.97 times
Sales Growth Rate
3 Years
Most Recent Year 1 Year Ago 2 Years Ago Ago
Interest Coverage 1.0 times 2.0 times 1.0 times 2.0 times
Coverage of Interest & Principal payments 0.29 times 0.80 times 0.65 times 1.01 times
Current ratio=
Acid-test ratio=
Liquidity
Ratios
Net Liquid Assets= Current assets – Inventory – Current Liabilities
3 Years
Most Recent Year 1 Year Ago 2 Years Ago Ago
Current ratio 2.83 times 2.92 times 3.00 times 1.91 times
Acid test ratio 1.85 times 1.98 times 2.17 times 1.40 times
Working capital $9.7 million $9.2 million $8.2 million $4.1 million
Net liquid assets $4.5 million $4.7 million $4.8 million $1.8 million
Before tax net income
total assets , net worth , or total sales
Profitability ROA =
Indicators
ROE =
Financial
Leverage Capitalization ratio=
Factor
Debt-to-sales ratio =
Profitability Trends at Black Gold, Inc.
Total liabilities/ net worth 1.67 times 1.74 times 2.03 times 2.20 times
It is standard practice among loan officers to compare each business customer’s performance
to the performance of the customer’s entire industry
Black Gold is a member of the crude oil and natural gas extraction industry
Accounts receivables
Getting short-term borrowings
Inventories
Postponing replacement of equipment
Repayment of liabilities
(fully depreciated)
Purchase of equipment
Pro Forma Statements
Performance prediction
+
Non-fund operating costs
Cost-Plus
Cost to analyze, grant and monitor the loan
Wages and salaries of loan personnel
Loan Pricing Cost of materials and physical facilities involved in the process
Method +
Estimated margin to compensate for default risk
+
Desired profit margin
Example
common pricing standard for all banks, both foreign and domestic,
leading international
banks in London were quoting a three-month average LIBOR on Eurodollar deposits of
about 5.30 percent. Assuming the default risk premium to be charged at 0.125% and profit margin would be
0.125%
a large corporation borrowing short-term money for 90 days might be quoted an interest rate on a multimillion
dollar loan of what percent?
solution
Net before-tax rate of return to the lender from the whole customer relationship
=
Example
Revenues expected is $216 000, Costs expected $125 000, Net amount of loanable funds supplied is
$1,230,000, then what would the net rate of return from the entire lender–customer relationship be? Is the
proposed loan acceptable?
solution
Net before-tax rate of return to the lender from the whole customer relationship
= 0 074 or 7.4%
Thank you